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ANNUAL REPORT1968

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INTERNATIONAL MONETARY FUND

ANNUAL REPORTOF THE

EXECUTIVE DIRECTORS FOR THEFISCAL YEAR ENDED APRIL 30, 1968

WASHINGTON, D. C.


CONTENTS

Page

Letter of Transmittal xiii

PART I. THE WORLD ECONOMY AND THE FUND

Chapter 1. GENERAL ECONOMIC SURVEY 3Introduction 3Trends in Industrial Countries 4Trade and Payments 6Developments in World Reserves 8The International Adjustment Process 10

Chapter 2. PROPOSED AMENDMENT TO THE FUND'S ARTICLES OF AGREEMENT 12The Fund's Work on International Liquidity, 1963 to 1968 12New Facility Based on Special Drawing Rights 14Changes in Fund Rules and Practices 15Conclusion 16

Chapter 3. THE FUND IN 1967/68 17Membership and Quotas 18Changes in Par Values 18Fund Transactions 18Consultations and Technical Assistance 21Proposed Distribution of Net Income 22

PART II. REVIEW OF THE YEAR

Chapter 4. WORLD TRADE, PAYMENTS, AND RESERVES 25World Trade 25

Principal Changes 25Impact of Economic Activity on Trade 27Exports and Trade Balances of Industrial Countries 30

Balance of Payments Developments 32Primary Producing Countries 32Industrial Countries 33

Changes in International Reserves 39Reserve Components and Policies 40Official Transactions and the Euro-Dollar Market 42

v


CONTENTS

Page

Chapter 5. DEVELOPMENTS IN THE INDUSTRIAL COUNTRIES 43Output and Demand 43Employment, Wages, and Prices 45Fiscal Policy 46Monetary Policy 48Sterling Devaluation 50The Short-Term Money Market 51The Long-Term Capital Market 54Restraints on International Capital Movements 58

Chapter 6. DEVELOPMENTS IN PRIMARY PRODUCING COUNTRIES 60Industrial Country Markets for Primary Producing Countries 60Developments in Commodity Markets 63Less Developed Countries 67

Trade and Output 67Balance of Payments Developments 72Some Recent Policy Developments 74

More Developed Primary Producing Countries 78

Chapter 7. GOLD 83Gold Holdings 84

Official Holdings 84Private Absorption 85

Gold Production 87Gold Movements 89

United States 89United Kingdom 90

Gold Markets and Prices 90London 90Paris 90Zurich 91Developments in Other Markets 92

Gold Subsidy Programs 92

SUPPLEMENTARYY NOTES

A. ACTIVITIES OF THE FUND 95Membership 95Executive Directors 95Article VIII 95Par Values 95Quotas 97Fund Transactions 97

Purchases 97Stand-By Arrangements 98Compensatory Financing of Export Fluctuations 101Waivers 102Repurchases 102

vi


CONTENTS Vii

Page

Currency Composition of Drawings, Repayment of Borrowings, andRepurchases 103

Summary of Transactions, 1948-68 105Fund Charges and Interest Payments 105Replenishment of Fund's Holdings of Currencies 107

Consultations with Members 108Technical Cooperation 108The IMF Institute 109Relations with Other International Organizations 109Staff I l lIncome, Expenditure, and Reserves 111Publications I l l

B. BALANCE OF PAYMENTS STATEMENTS 113

APPENDICES

I. Executive Board Decisions and Report Proposing Amendment of Articles ofAgreement 127

A. Repurchases: Small Amounts Included in Article V, Section 7(b) ,Obligations 127

B. Report of the Executive Directors and Proposed Amendment to theArticles of Agreement 127

Establishment of a Facility Based on Special Drawing Rights in theInternational Monetary Fund and Modifications in the Rules andPractices of the Fund (for contents see pp. 130-32) 129

II. Executive Directors and Voting Power 175

III. Changes in Membership of Executive Board 178

IV. Administrative Budget 181

V. Comparative Statement of Income and Expenditure 183

VI. Financial Statements 184International Monetary Fund 185Staff Retirement Fund 190

Index 195

LIST OF TABLES

1. Growth in Value of Imports and Changes in Trade Balances of Major Areas,1964-67 25

2. Industrial Countries: Growth of Export Markets and Exports, 1966 and 1967 303. Industrial Countries: Growth in Value of Exports and Changes in Trade

Balances, 1966 and 1967 314. Balance of Payments Summary, 1966 and 1967 33


Viii CONTENTS

Page

5. Industrial Countries: Balance of Payments Summary, 1966 and 1967 346. Industrial Countries: Balances on Long-Term Capital Account, 1965-67 377. Industrial Countries: Private Short-Term Capital Movements (Including Errors

and Omissions), 1966-First Quarter 1968 388. Germany and Italy: Changes in Central Bank Swap Commitments with Com-

mercial Banks, 1965-First Quarter 1968 399. Summary of Changes in Countries' Official Reserves, 1965-First Quarter 1968 40

10. Countries' Official Reserves, 1966 and 1967 4111. Selected Countries: Changes in Discount Rates, January 1967-July 19, 1968 4912. New Issues of International Bonds in Europe and North America, 1963-67 5713. Primary Producing Countries: Exports, 1962 and 1966 6114. Primary Producing Countries: Changes in Exports of Various Regions and

Groups of Countries, 1965-67 6315. Primary Producing Countries: Changes in U.S. Dollar Value of Exports of

Seven Primary Commodities from Major Producers, 1963-67 6616. Less Developed Countries in Asia: Changes in Exports and Imports, 1960-67 6717. Less Developed Countries in Africa and the Middle East: Changes in Exports

and Imports, 1960-67 6918. Less Developed Countries in the Western Hemisphere: Changes in Exports and

Imports, 1960-67 7119. Less Developed Primary Producing Countries: Summary of Current, Capital,

and Over-All Balances, 1965-67 7320. More Developed Primary Producing Countries: Changes in Exports and

Imports, 1960-67 8021. More Developed Primary Producing Countries: Summary of Trade, Services

and Private Transfers, and Current Balances, 1965-67 8122. More Developed Primary Producing Countries: Summary of Current, Capital,

and Over-All Balances, 1965-67 8123. Gold: Marketed Stocks and Distribution by Use, 1965-First Quarter 1968 8524. Gold: Marketed Stocks and Distribution by Use, 1956-First Quarter 1968 8725. Gold: Value of World Production, 1940, 1945, and 1963-67 8826. United States: Gold Transactions, 1965-First Quarter 1968 8927. Countries That Have Accepted Article VIII, April 30, 1968 9528. Initial Par Values Established and Changes in Par Values, Fiscal Year Ended

April 30, 1968 9629. Increases in Quotas, Fiscal Year Ended April 30, 1968 9830. Purchases of Currencies from the Fund, Fiscal Year Ended April 30, 1968 . 9931. Fund Stand-By Arrangements for Members, Fiscal Year Ended April 30, 1968 . 10032. Use of Fund Resources Under the Decision on Compensatory Financing of

Export Fluctuations, Fiscal Years Ended April 30, 1967 and 1968 10133. Repurchases of Currencies from the Fund, Fiscal Year Ended April 30, 1968 10334. Drawings and Repurchases by Currency, Fiscal Year Ended April 30, 1968 10435. Repayments by Currency Under the General Arrangements to Borrow, Fiscal

Year Ended April 30, 1968 10436. Summary of Fund Transactions, Fiscal Years Ended April 30, 1948-68 10537. Belgium-Luxembourg: Balance of Payments Summary, 1966-First Quarter

1968 11338. Canada: Balance of Payments Summary, 1966-First Quarter 1968 11439. France: Balance of Payments Summary, 1967 115


CONTENTS

Page

40. Federal Republic of Germany: Balance of Payments Summary, 1966-FirstQuarter 1968 116

41. Italy: Balance of Payments Summary, 1966-First Quarter 1968 11742. Japan: Balance of Payments, 1966-First Quarter 1968 11843. Netherlands: Balance of Payments Summary, 1966-First Quarter 1968 11944. United Kingdom: Balance of Payments Summary, 1966-First Quarter 1968 12045. United States: Balance of Payments Summary, Seasonally Adjusted, 1966-

First Quarter 1968 12146. Primary Producing Countries: Balance of Payments Summaries, 1966 and

1967 122-23

LIST OF CHARTS

1. Industrial Countries: Gross National Product at Constant Market Prices,1964-First Half 1968 4

2. World Trade, 1963-First Quarter 1968 63. Changes in Countries: Official Reserves, 1960-68 94. Industrial Countries: Value of Imports and Industrial Production, 1964-First

Quarter 1968 265. Trade Flows Between Selected Industrial Countries and Areas, 1964-First

Quarter 1968 286. Trade of Primary Producing Countries: 1963-First Quarter 1968 307. Selected Countries and Areas: Current, Capital, and Over-All Balances,

1963-67 358. Selected Areas and Countries: Industrial Production, Seasonally Adjusted,

1964-First Quarter 1968 449. EEC Countries: Industrial Production, Seasonally Adjusted, 1964-First

Quarter 1968 4410. Selected Areas and Countries: Wage Rates, 1964-First Quarter 1968 4511. Selected Countries: Wage Cost per Unit of Output in Manufacturing, 1964-

First Quarter 1968 4612. Selected Areas and Countries: Cost of Living, 1964-First Quarter 1968 4613. Selected Areas and Countries: Wholesale Prices, 1964-First Quarter 1968 4614. Discount Rates, 1964-July 19, 1968 4815. Short-Term Interest Rates, 1964-May 1968 5316. Covered Three-Month Arbitrage Margin and U.K. Private Short-Term Capital,

1966-June 1968 5417. Long-Term Government Bond Yields, 1964-May 1968 5518. Selected Countries: Industrial Bond Yields, 1964-May 1968 5619. Term Structure of Interest Rates 5720. Imports of Industrial Countries from Primary Producing Countries, 1964-67 . 6221. Prices of Primary Products and Changes in Production in Industrial Countries,

by Half Years, 1962-67 6422. Prices of Commodities Exported by Primary Producers, 1962-First Quarter

1968 6423. Selected Primary Products: Average Prices, 1963-First Quarter 1968 6524. Gold: Estimated New Supplies arid Absorption, 1951-First Quarter 1968 86

ix


CONTENTS

Page

25. Gold: Price in London Market, Monthly Averages, March 1954-March 14,1968 91

26. Gold: Prices in London and Zurich, March-June 1968 9127. Outstanding Drawings from the Fund and Amounts Not Drawn Under Existing

Stand-By Arrangements, on April 30, 1948-68 106

The following symbols have been used throughout this Report:

. . . indicate that data are not available;

— indicates that the figure is zero or less than half the final digit shown, orthat the item does not exist;

- is used between years or months (e.g., 1965-67 or January-June) to in-dicate a total of the years or months inclusive of the beginning and endingyears or months;

/ is used between years (e.g., 1967/68) to indicate a fiscal year or a cropyear.

Minor discrepancies in totals shown in the tables and in percentages are due torounding.

X


INTERNATIONAL MONETARY FUND

Pierre-Paul Schweitzer

Managing Director and Chairman of the Executive Board

Frank A. Southard, Jr.

Deputy Managing Director

Executive DirectorsWilliam B. DaleE. W. MaudeGuenther SchleimingerGeorges PlescoffB. K. MadanAhmed Zaki SaadFrancesco Palamenghi-CrispiHideo SuzukiS. J. Handfield-JonesJ. O. StonePieter LieftinckAndre van CampenhoutJorge Gonzalez del ValleTorben FriisPaul L. FaberAlexandre KafkaAdolfo C. DizBeue TannAmon NikoiAntoine W. Yameogo

Alternate Executive DirectorsJohn S. HookerGuy HuntrodsHorst UngererPaul MentreArun K. BanerjiAlbert MansourCosta P. CaranicasSeitaro HattoriPatrick M. ReidA. M. de VilliersH. M. H. A. van der ValkHerman BironAlfredo Phillips O.Jorma ArankoLeonard A. WilliamsEduardo da S. Gomes, Jr.Yamandu S. PatronC. L. Chow

Leon M. Rajaobelina

Senior Officers

The General CounselThe Economic CounsellorAdministration DepartmentAfrican DepartmentAsian DepartmentCentral Banking ServiceEuropean DepartmentExchange and Trade Relations DepartmentFiscal Affairs DepartmentIMF InstituteLegal DepartmentMiddle Eastern DepartmentResearch DepartmentSecretary's DepartmentTreasurer's DepartmentWestern Hemisphere DepartmentBureau of StatisticsOffice in Europe (Paris)Office in Geneva

Joseph GoldJ. J. PolakPhillip Thorson, DirectorMamoudou Toure, DirectorD. S. Savkar, DirectorJ. V. Mladek, DirectorL. A. Whittome, DirectorErnest Sturc, DirectorRichard Goode, DirectorF. A. G. Keesing, DirectorJoseph Gold, DirectorJohn W. Gunter, Acting Director1J. J. Polak, DirectorW. Lawrence Hebbard, SecretaryOscar L. Altman, TreasurerJorge Del Canto, DirectorEarl Hicks, DirectorJean-Paul Salle, DirectorEdgar Jones, Director

Chief Editor

1 Anwar Ali, Director (on leave).

Roger V. Anderson

July 19, 1968

XI


LETTER OF TRANSM1TTAL

TO THE BOARD OF GOVERNORS

July 19, 1968

My dear Mr. Chairman:

In accordance with Section 10 of the By-Laws of the International MonetaryFund, I have the honor to present to the Board of Governors the Annual Reportof the Executive Directors for the fiscal year ended April 30, 1968.

Yours sincerely,

/s/

PIERRE-PAUL SCHWEITZER

Chairman of the Executive Board

Chairman of the Board of Governors

International Monetary Fund

xni


Part I

THE WORLD ECONOMY AND THE FUND


Chapter 1

General Economic SurveyIntroduction

HE performance of the world economy during1967 was characterized by a mixture of

marked progress and serious difficulty. The im-mediate challenge to stem and reverse the slow-down in economic activity that had begun in 1966was met effectively. However, the decelerationand subsequent recovery in the trend of activitywere accompanied by and contributed to balanceof payments developments that aggravated long-standing problems and underlined the need toimprove the functioning of the international mone-tary system.

The slowdown of demand and output in majorindustrial countries during the course of 1966became more pronounced and more pervasive inthe first half of 1967. This led to a substantialreduction in the growth of world trade, the effectsof which were felt in most parts of the world.Commodity prices tended to weaken, and strainsdeveloped in the external positions of many pri-mary producing countries. However, the recoveryof economic activity in industrial countries thatbegan around the middle of 1967 engendered astrong resurgence of growth in world output andtrade toward the end of the year and in the firstpart of 1968.

The United Kingdom suffered severe difficultiesduring 1967 as slower growth in its export marketsand a number of special circumstances added tothe weakness of its balance of payments position.The resulting sterling crisis and devaluation causedthe most serious disturbances in the world mone-tary system during the year. Sterling's troubleswere, however, but one aspect of an internationalpayments disequilibrium prevailing over a num-ber of years. This disequilibrium also involvedcontinuous balance of payments deficits in theUnited States and a sizable over-all surplus for theindustrial countries of continental Europe takenas a group. During 1967 the continental Europeansurplus remained high and the U.S. balance ofpayments deteriorated seriously. In the aftermath

of sterling devaluation, speculative pressuresshifted to the U.S. dollar but did not abate in thecase of sterling itself. Private demand for goldbecame intense, and flared up again early in 1968despite the announcement of a stronger andbroader balance of payments program by theUnited States on January 1.

The heavy strains to which the internationalmonetary system was subjected in 1967 and thefirst half of 1968 put international financial coop-eration to its severest test in a long time. Thiscooperation, as reflected in the responses of inter-national financial institutions and of national mon-etary authorities acting in concert, provided timely,albeit temporary, support to the system while com-prehensive measures were being adopted by theUnited Kingdom and the United States to redresstheir balance of payments positions. The devalua-tion of sterling and of 14 other member currenciesin November 1967 was an orderly operation,especially noteworthy for the fact that the sterlingdevaluation occurred with the financial support ofother major industrial countries and without achange in the exchange rate of any of them. Inter-central-bank assistance, by means of swap agree-ments and other techniques, countered specula-tive capital movements and eased severe intermit-tent pressures on sterling and on the U.S. dollar.With the payments deficit of the United Statescontinuing, monetary authorities in other countrieswere prepared to accumulate additional claims onthe United States rather than to make substantialcalls on the U.S. gold stock. In mid-March 1968,the seven central banks actively participating inthe London gold pool dealt with the massive pri-vate hoarding of gold by establishing a two-pricesystem that permitted the price in private marketsto be determined by the forces of supply anddemand without official intervention. (See Chap-ter 7.)

Also in March 1968, the United Kingdomadopted a restrictive budget that gave clear evi-dence of its determination to deal energeticallywith its balance of payments problem, and thus to

3

T


ANNUAL REPORT, 1968

ensure the effectiveness of the devaluation. Latein June, the U.S. Administration's tax bill, accom-panied by expenditure cuts, was enacted after adelay of many months. These developments, aswell as the measures taken with respect to goldmarkets and to future international liquidityarrangements (Chapter 2), were generally viewedas salutary. But the restoration of enduring con-fidence and stability in the international monetarysystem depends primarily on the achievement ofearly and progressive improvement in the externalpositions of both the United Kingdom and theUnited States.

With the enactment of the new fiscal measures,U.S. policies are designed to bring about a substan-tial moderation in the growth of aggregate demandduring the latter half of 1968 and the first part of1969 for the principal purposes of relieving infla-tionary pressures and dampening imports. InCanada, Japan, and the United Kingdom also, thedirection of policies toward restraint—as planned—should mean little, if any, rise of imports duringthis period. In these circumstances, continentalEuropean countries with unutilized capacity should,with due regard to stability, make full use of theirmargins for economic expansion so as to supportthe growth of world trade and to help eliminatethe disequilibrium in international payments. Thesituation poses an important challenge to the effec-tive working of the international adjustmentprocess.

Trends in Industrial CountriesCulminating a strong expansion of more than

five years, the growth of total real output in theindustrial countries reached an annual rate ofalmost 6 per cent in the second half of 1965 andheld close to that figure in the first half of 1966(Chart 1). The rate of increase in total outputdeclined markedly in the second half of 1966, andit was further reduced to less than 2Vi per cent inthe first half of 1967. Japan and Italy, where out-put continued to expand rapidly, were majorexceptions to the general economic decelerationin the industrial world from mid-1966 to mid-1967.1 Since then, however, a new upsurge of

1 In terms of the more volatile measure of quarterlyindustrial production, the deceleration involved the shiftfrom an increase of 11 per cent (annual rate) in thefirst quarter of 1966 to small declines in the first twoquarters of 1967.

CHART 1. INDUSTRIAL COUNTRIES: GROSS NATIONALPRODUCT AT CONSTANT MARKET PRICES,

1964-FmsT HALF 1968 *(Percentage change from preceding half year, at annual

rates, seasonally adjusted)

1 Data for first half of 1968 are estimated.2 Change for first half of 1968 is not shown because of

difficulty in estimating effect of the May-June strikes.3 Gross domestic product at factor cost.

activity in the industrial countries has developed.For the industrial countries as a group, there

was no general slowdown of economic growthduring the first half of the 1960's, and continuingstrong demand sustained a rapid expansion inworld trade. By late 1965 or early 1966, thevigor of demand forces generated overheating inGermany, in some other industrial countries ofEurope, and in the United States and Canada. Asinflationary strains developed and, in some coun-tries, external trade accounts deteriorated, theauthorities in a number of the leading countriesdecided to restrain aggregate demand in order to

4


GENERAL ECONOMIC SURVEY 5

reduce the pressure on domestic resources. Rela-tively little use was made of fiscal policy for thispurpose, and during most of 1966 monetaryrestrictiveness was the dominant feature of nationaleconomic policy in most industrial countries. Inthe United Kingdom pressures were intensedespite relatively slow growth, and severe fiscaland incomes-policy measures had to be adoptedin July 1966 to cope with domestic inflation anda balance of payments crisis. Principal exceptionsduring 1966 to the pattern of strains on availableresources were France, Italy, and Japan, all ofwhich had significant margins of unutilized eco-nomic capacity as a result of earlier stabilizationprograms.

The very tight conditions in financial markets,together with some weakening of underlying expan-sionary forces, brought about a marked decreaseof industrial production in Germany during thesecond half of 1966 and, toward the close of theyear, a leveling out or dip in the United States,Canada, the United Kingdom, France, and theNetherlands. The economic situation in thesecountries generally showed a further weakeningduring the first half of 1967, although this waslimited by the dramatic easing of monetary policythat had begun late in 1966 and, in the UnitedStates and Canada, by a switch to fiscal stimulus.In Germany, where recessionary tendencies werestrongest, total output actually declined at anannual rate of 3 per cent from the second half of1966 to the first half of 1967, and in the UnitedStates it increased by only 11/2 per cent.

In Europe, the softening of economic activityduring 1966-67 led to virtual elimination of thepressure on domestic resources in Germany andmoderated this pressure in several other countries.By mid-1967 unemployment had by postwar stan-dards reached high levels in Germany, the Nether-lands, and the United Kingdom, and it was stillrising in France and Belgium. Except in France,rates of wage and price increases in these countriestended to decline, with incomes policy being aspecial force in the case of the United Kingdom.In France, wage pressures eased little and con-sumer prices continued to advance noticeably. Inthe United States, the slowing of economic activitywas reflected in only a limited reduction of infla-tionary pressures. Labor markets remained fairlytight and wage rates continued to increase strongly.There was some moderation of price increases in

the first half of 1967, but later in the year a sharpupward movement developed. In Canada, costand price pressures were severe throughout 1967,despite an increase in the unemployment rate.

In the course of 1967 a number of continentalEuropean countries took steps to encouragerenewed economic expansion. Monetary policywas generally eased further during the first halfof the year; fiscal action was also undertaken,although the continued evidence of price pressures—and, in certain instances, an unbalanced budgetstructure—inclined the authorities to be somewhatcautious in their approach. A widespread eco-nomic recovery became evident during the secondhalf of 1967 both on the continent of Europe—notably in Germany—and in the United States,where the problem for policy became one ofrestraining the expansion of aggregate demand.In January 1967 the U.S. Administration hadannounced its intention of asking for higher taxeson the incomes of individuals and corporations,and in August the request for a 10 per cent taxsurcharge was sent to the Congress. Monetarypolicy became noticeably restrictive in late 1967and early 1968 but, in the absence of fiscalrestraint, aggregate demand expanded at an exces-sive rate, the rise in prices accelerated, and theexternal trade surplus declined sharply as importsshowed a strong upsurge. Taken together, theindustrial countries registered an expansion intotal output of 4l/2 per cent in the second half of1967; the expansion in the first half of 1968 wasprobably at least that much, notwithstanding theeffects of the May-June strikes in France.

Although economic growth in industrial coun-tries has thus made a pronounced recovery sincethe middle of 1967, the associated price and costperformance—in addition to its undesired domes-tic effects in some countries—has not been helpfulto the balance of payments adjustment process.During the period 1962-65, it will be recalled, theU.S. economy was in the process of absorbing thesubstantial margin of unutilized resources that haddeveloped in the latter part of the 1950's and inthe 1960-61 recession, whereas on the continentof Europe high rates of resource utilization weregeneral. In the prevailing circumstances, costs andprices were essentially stable in the United Statesbut advanced markedly in Europe; this combina-tion of developments worked in the direction ofreducing the U.S. balance of payments deficit and


ANNUAL REPORT, 1968

of moderating European surplus positions. Forsome two and a half years, however, prices andcosts in the United States have increased at leastas much as in Europe, and since mid-1967 theU.S. increase appears to have been significantlylarger. The underlying causal factor—fuller utili-zation of resources in the United States than inmost of Europe—also has income, as well as price,effects that run counter to a reduction of the dis-equilibrium in international payments.

Trade and Payments

Slow growth of output in the industrial countrieswas the main cause of a pronounced break in thegrowth of world trade from the third quarter of1966 to the third quarter of 1967 (Chart 2). Theincrease in value of world trade during that periodamounted to only 2 per cent, with total imports ofprimary producing countries showing no netchange.

In the fourth quarter of 1967 and the first quar-ter of 1968, there was a remarkably sharp expan-sion of imports by the industrial countries and oftotal world trade. The dominant factor in thisupsurge, which evidently continued into the secondquarter, was rapid demand expansion in the UnitedStates, coupled with large U.S. imports of copperand steel induced by actual or anticipated strikes.In light of the expected slowdown in the U.S.economy because of fiscal restraint, a marked

CHART 2. WORLD TRADE, 1963-FiRST QUARTER 1968

(1963 — 100; seasonally adjusted)

change in the trend of U.S. imports seems likelyto occur in the second half of 1968. For this andother reasons, discussed in the final section of thissurvey, the rapidity of growth in world trade dur-ing late 1967 and the first half of 1968 was prob-ably of a temporary character.

The recent experience provides fresh evidenceof the well-known fact that fluctuations in thepace of economic activity in the industrial worldhave a direct and marked impact on the primaryproducing countries. Most of these countries wereaffected during 1966-67 by the weakness of de-mand in industrial countries—which take about70 per cent of their exports—and by the associatedweakness of prices in the markets for many of thecommodities that they produce. Although theprices of individual commodities are influencedby diverse forces, changes in the general level ofraw material prices have tended to reflect varia-tions in the growth of output in industrial coun-tries and the average of these prices declined inthe second half of 1966 and through much of1967. (See Chart 21 and accompanying discus-sion.) A limited number of primary producingcountries, in special situations, expanded theirexports, but the majority suffered a much reducedgrowth of exports or actual declines. This had adampening effect on economic activity, not onlydirectly but also because many countries had tolimit the expansion of domestic demand in orderto protect their external positions.2

In addition, of course, activity in the large anddiverse group of primary producing countries wasaffected by a variety of less general influences. Animportant one was the improvement of weatherconditions, and of agricultural production, on theIndian subcontinent and in some other areas. Allin all, it now appears that the total output of pri-mary producing countries expanded from 1966 to1967 at about the same rate (4-4V2 per cent) asin the previous year—a rate that cannot be con-sidered satisfactory in view of the high populationgrowth and low levels of income prevailing in mostof these countries.

2 Primary producing countries continued to attract arising flow of imports through the first half of 1967,and there was a widespread tendency to deteriorationin their trade balances. The cumulating pressure ofthis deterioration, together with some special factors,led to a sharp downward adjustment in the level ofprimary producers' imports during the second half of1967 and the first quarter of 1968.

6


GENERAL ECONOMIC SURVEY

Among the more developed primary producingcountries, the balance of payments experience ofcountries in Europe 3 in 1967 contrasted with thatof Australia, New Zealand, and South Africa as agroup. In the European countries, a substantialreduction in their combined current account deficitwas counterbalanced by a decline in the net capitalinflow, and the over-all position remained close tobalance. The three countries in the SouthernHemisphere sustained a marked worsening in theircurrent account deficit, but the inflow of capitalremained at a high level and enabled them to holdtheir over-all deficit in 1967 to modest proportions,following upon a surplus of $0.2 billion the yearbefore.

The aggregate current account deficit of the lessdeveloped group of primary producing countriesincreased by about $ll/2 billion to $6 billion in1967. This deterioration, which occurred in spiteof the sharp drop in imports during the secondhalf of 1967, was offset in part by a rise in the flowof official capital and aid, which accrued almostentirely to a few Asian countries. The inflow ofprivate long-term capital was only moderatelyabove the low rate recorded for 1966, but short-term flows showed a favorable swing. On balance,the less developed countries realized an over-allsurplus of $1.0 billion in 1967, compared with$0.6 billion for 1966. The bulk of this improve-ment, however, was concentrated in a relativelyfew countries and stemmed in major part fromofficial short-term borrowing in the face of balanceof payments difficulty.

In the event, most primary producing countriesexperienced balance of payments pressures in1967. Losses in official reserves predominated,and the comparatively few increases that occurredmainly reflected special situations rather thanstrength of the external position.4 A number ofthese countries devalued their currencies, particu-larly in November at the time of the sterling deval-uation; and many adopted fiscal and monetarymeasures to restrain imports, or imposed restric-tions. Greater assistance was obtained from the

3 Finland, Greece, Iceland, Ireland, Portugal, Spain,Turkey, and Yugoslavia.

4 It may be noted that the figures on official reservesof primary producing countries at the end of 1967 (shownin Table 10) reflect the lower U.S. dollar value of sterlingassets resulting from devaluation of the pound. Thisreduction was of the order of $0.5 billion.

Fund, including an increased use of the facilityfor compensatory financing of export shortfalls.

Strong demand expansion in industrial countriesover the latter part of 1967 and into the first halfof 1968 undoubtedly benefited the exports ofprimary producing countries and led to a recoveryin their current account. Beyond this, however, theexternal position will continue to constitute aperiodic brake on development efforts of the pri-mary producing countries unless the flow of capitaland aid to them is expanded substantially andunless their exports are afforded freer access tothe markets of industrial countries. But primaryproducing countries, on their part, need to achievea greater degree of financial stability in order tostimulate the inflow of foreign resources; and theymust also take various measures on the supplyside if an increasing flow of these resources is tobe used effectively and if the capacity to fillexpanded export markets is to be developed. Suchefforts by these countries to improve the externalposition should of course be part of a continuingpolicy approach that includes as a fundamentalelement the effective mobilization of domesticresources.

Among the industrial countries, the dominantfeature of balance of payments developments in1967 was the unsatisfactory record of the UnitedKingdom and the United States. Beyond this,particularly noteworthy developments took placein Germany and Japan.

Striking changes in the current account balancesof Germany and Japan were clearly related to thepressure of demand in those countries relativeto that in other industrial countries. Germany'scurrent surplus widened by $2.4 billion r> from1966 to 1967 as the recession cut back importswhile exports continued to expand. The continuedrapid growth of the Japanese economy during1967, while many other industrial economies werefaltering, led to the disappearance of the currentaccount surplus, which had reached $1.4 billion in1966. However, in each country a change indomestic monetary policy—a marked easing inGermany and a tightening in Japan—encouragedequilibrating capital flows, to the effect that theover-all payments position was just about in bal-ance for 1967 as a whole. This represented adecline of $0.5 billion in Germany's payments

r> This and other figures in the paragraph are drawnfrom Table 5.

7


8 ANNUAL REPORT, 1968

surplus, but the surplus of most other continentalEuropean countries widened and the area's over-all surplus remained in excess of $lVi billion.

In the United Kingdom, the salient fact of bal-ance of payments experience in 1967 was that thedeficit on current and long-term capital accountswas four times as great as in 1966. During thesecond half of 1967, the trade account deterioratedsharply and short-term capital outflows becamelarge.

Since the devaluation of sterling on Novem-ber 18, the United Kingdom has acted with increas-ing vigor to hold down home demand for domesticoutput and for imports, and to contain wage andprice increases, in order that the devaluation maybring about a shift in resource utilization and asubstantial surplus in the balance of payments.Nonetheless, signs of improvement in the tradeaccount were slow to appear and sterling remainedsubject to speculative pressures, particularly in theperiod prior to the budget on March 19 and againin May. For June, the trade returns were moreencouraging.

Devaluation by the United Kingdom did notgive rise to an exchange rate adjustment by anyother country that accounts for a substantial shareof world trade. The currencies of 14 other mem-ber countries were devalued in November 1967;these actions were necessary because of close eco-nomic relationships with the United Kingdom orsevere payments difficulties that already existed.

Although the November devaluations were car-ried out smoothly, the adoption of a new parityfor a major reserve currency had the effect, in theprevailing circumstances, of creating uncertaintiesabout the stability of currencies in general and ofthe U.S. dollar and the pound sterling in particular.A serious weakening of confidence was manifestin the absence of any large return flow of funds tothe United Kingdom, despite an 8 per cent BankRate, and in substantial shifts of funds from U.S.dollar assets into the major continental Europeancurrencies and into gold. These shifts, reflectingmarket reaction to continuation of the long-standing deficit in the U.S. external accounts, vir-tually ceased for a while after announcement of astrengthened U.S. payments program on Janu-ary 1, 1968. However, the upsurge of U.S.imports during late 1967 and early 1968,together with evident difficulties in making partsof the new program effective, contributed torenewed movements of funds out of U.S. dollars

into continental currencies and into gold, until theofficial supply of gold to private buyers was cutoff in mid-March.

In the first quarter of 1968, the deficit in theU.S. balance of payments was at an annual rate(seasonally adjusted) exceeding $2 billion on bothan official settlements basis and in terms of the"liquidity" definition used in the U.S. accounts.(See Supplementary Note B, Table 45.) Althoughthis outturn represented a great improvement overthe fourth quarter of 1967, when the deficit wasexceptionally large, it was unsatisfactory in lightof the requirements of the international monetarysituation and of the U.S. goal, as announced onJanuary 1, of bringing the balance of payments"to—or close to—equilibrium" in 1968.

The improvement in the U.S. balance of pay-ments from the fourth quarter of 1967 to the firstquarter of 1968 centered in the capital account,which benefited from the strengthened programsof capital control and the further rise in U.S. inter-est rates. But a disturbing feature of first-quarterdevelopments was the sharp deterioration of thesurplus on merchandise trade, attributable mainlyto the effect on imports of rapid expansion ofaggregate demand in the United States. Moreover,it was evident that in the second quarter of 1968demand expansion was still rapid and the upwardpressures on costs and prices continued strong.These considerations, among others, gave urgencyto the need for the measures of fiscal restraintfinally enacted at the end of June.

Developments in World Reserves

The major disturbances in the internationalfinancial system during 1967 and early 1968 gaverise to unusual changes in world reserves.6 Thesechanges were even less subject to pattern thanthose which had taken place during 1965 and1966.

In Chapter 2 of the 1967 Annual Report, it wasnoted that developments in 1965-66 had differedfrom the earlier postwar pattern in importantways: in the pace of reserve growth, in the assetcomposition of that growth and in its determinants,

6 These reserves are here defined as countries' holdingsof gold and of foreign exchange in convertible currenciesand their reserve positions in the Fund. A country'sreserve position in the Fund equals the sum of its goldtranche position and its readily repayable claims on theFund under a loan agreement.


GENERAL ECONOMIC SURVEY

and in the extent of associated repayment liabili-ties. In brief, the increase in total reserves haddecelerated; reserves in their traditional forms,gold and foreign exchange, had moved erraticallyand in a generally downward direction; and reservepositions in the Fund had risen by exceptionalamounts, reflecting primarily large drawings bythe United Kingdom in 1965 and members' addi-tional gold subscriptions to the Fund in 1966.Special financing transactions of the United King-dom had since late 1964 been a major source ofworld reserve growth. This growth had amountedto only $0.9 billion, or 1.3 per cent, in the 12months through March 1967, which were vir-tually free of any net impact of such transactions,whereas the growth from 1960 through 1964 hadaveraged $2.1 billion, or 3.3 per cent, a year.

In the 12 months to the end of March 1968,countries' official reserves increased by $2.0 billionin the aggregate; foreign exchange holdingsexpanded by $5.1 billion, while the official stockof gold fell by $2.6 billion and reserve positions inthe Fund recorded a decline of $0.5 billion attrib-utable primarily to the repurchases by the UnitedKingdom in May and November 1967. However,the accrual of foreign exchange included a largeelement that clearly was special and temporary,i.e., the rise in U.S. holdings as the counterpart ofcurrency swaps that were due to be reversed withina short time. Exclusive of these holdings underswaps,7 total reserves during the 12 months endedMarch 1968 show a small decline (Chart 3). Atthe same time, it should be borne in mind that thedevelopment of official reserves in this period wasaffected by a variety of other special operations inforeign exchange on the part of central banks,including substantial sales of exchange by theBundesbank under swap contracts with the Ger-man commercial banks during late 1967 and thefirst quarter of 1968. Also noteworthy, the dollarvalue of sterling holdings was reduced by an esti-mated $0.6 billion as a result of the devaluationof the pound.

The shifts in the gold and foreign exchange com-ponents of total reserves during the year endedMarch 1968 reflected mainly the sizable over-alldeficits incurred by the United Kingdom and theUnited States, and the accompanying speculationagainst the two reserve currencies. After a briefspell of relative ease at the beginning of the period,

7 Consisting of an estimated $2.2 billion in poundssterling and $250 million in Canadian dollars.

CHART 3. CHANGES IN COUNTRIES' OFFICIALRESERVES, 1960-68 '

(In billions of U.S. dollars)

1 Years ended March 31.2 Adjusted to exclude U.S. holdings of pounds sterling

and Canadian dollars under swaps. Similar adjustmentsfor earlier years would be small.

the pound was subjected to intermittent pressuresfrom the end of May until the time of devaluation,and again in March 1968, while expectations of apossible increase in the official price of gold trig-gered two large waves of private gold buying inNovember and December 1967 and another begin-ning late in February 1968. The demand was metby the seven central banks actively participatingin the London gold pool; in order to prevent theprice of gold in London from rising above theofficial price, they sold more than $3 billion ofgold through the market there from November to



mid-March, when they decided to discontinue suchtransactions and to allow the price of gold in pri-vate markets to be determined by market forces.At $37.8 billion, the gold holdings of nationalmonetary authorities at the end of March 1968were lower than at any time in more than a decade.

Most of the combined deficit of approximately$6 billion recorded for the two reserve currencycountries in the year ended March 1968 wasfinanced through an increase in liabilities—thusaccounting for the bulk of reserve creation in theform of foreign exchange assets during this period.The major part of the increase in sterling liabilitiesrelated to swaps of sterling against U.S. dollarsfor use in the defense of the pound. The increasein U.S. liabilities to foreign official holders had itsmain counterpart in the accumulation of dollarclaims by a relatively few industrial countries. Aspointed out in Chapter 2 of last year's AnnualReport, a number of countries had come to theview that some restraint in the conversion ofdollars into gold might be advisable. In therecent period, it was particularly significant thatseveral European countries were prepared to con-tinue the policy of holding substantial dollarbalances. At the same time, the United Statesmade use of currency swaps to facilitate some ofthe accumulation of dollars, and further amountsof nonmarketable U.S. Treasury paper denomi-nated in foreign currencies were substituted fordollars held outright. Also, concerted action wastaken by a number of central banks and the Bankfor International Settlements in order to countererratic capital movements that on several occasionsresulted in massive flows of dollars into Euro-pean financial centers.

In sum, reserve developments over the pastseveral years have been dominated by specialand erratic influences that, on balance, have ledto a substantially slower accumulation of coun-tries' official reserves than in prior periods. Suchdevelopments could not, over the longer run, beexpected to provide the basis for a satisfactoryperformance of the world economy.

The International Adjustment Process

The economic policies of four industrial coun-tries—the United States, Canada, the United King-dom, and Japan—are now in a phase of restraint.

In each of these countries, the general objectiveis to hold the expansion of aggregate demandwithin the limits of productive capacity and toreduce the pressure on domestic resources. Thisobjective is appropriate on both domestic andexternal grounds.

In the United States, where the application ofeffective financial restraint was delayed for manymonths by the stalemate over fiscal legislation,it has now become necessary temporarily torestrain demand expansion so as to bring thegrowth of real GNP well below the capacity rateof 4 per cent and thus to relieve upward pres-sures on costs and prices and to dampen imports.During this period of economic adjustment, it isessential that the U.S. authorities should maintaina sufficient degree of monetary restraint to pro-vide firm support to the programs of control overoutflows of U.S. capital.

Pursuit of fiscal and monetary policies of thegeneral character now envisaged, combined withthe strengthened programs of capital control,should make for a substantial improvement inthe U.S. balance of payments. Elimination of thedeficit must now become a primary objective ofeconomic policy, in the interest of the UnitedStates itself and of the international monetarysystem. It is generally agreed that equilibriumin the U.S. balance of payments should, in thelonger term, encompass a removal of capital con-trols in line with the necessary enlargement of thecurrent account surplus.

In conjunction, the policies of restraint nowbeing applied by the United States, Canada, theUnited Kingdom, and Japan should have theeffect of sharply retarding the growth of importdemand in these countries during the secondhalf of 1968 and at least the first part of 1969.Clearly, the maintenance of a satisfactory growthof world trade and activity in such a situationwould require expansionary policies on the partof some other industrial countries—countries incomfortable balance of payments and reserve posi-tions, and with a margin of unutilized capacity.Fortunately, the economic recovery of continentalEurope from the marked 1966-67 slowdown isproceeding apace, encouraged by governmentalpolicies. In France, the problem for economicpolicy has now become one of ensuring domesticand external stability, along with satisfactorygrowth, in the face of pressures emanating from


GENERAL ECONOMIC SURVEY 1 1

the wage settlements reached after the recentwave of strikes.

With maintenance of the current expansionaryclimate, the import-generating capacity of con-tinental Europe in the period ahead should be verysubstantial. The concurrent elimination of pres-sures in the U.S. economy and absorption of slackin European economies could have a pronouncedeffect in restoring the U.S. trade surplus to amore adequate level and, more generally, in re-ducing the disequilibrium in international pay-ments.

Although it is thus possible to sketch in broadoutline the evolving patterns and trends in theworld economy, and the desired direction of coun-tries' policies, the outcome will depend heavilyon the actual policy measures taken, as well ason developments now unforeseen. Economic poli-cies in member countries continue to be governedprimarily by domestic considerations, and theinstruments of policy invariably have limitations,in part reflecting institutional and political factors.However, a growth of international cooperationtoward improving the international adjustmentprocess has become evident over the years. Animportant example of this has been the responseof continental European governments to the situa-tion posed by the introduction of the U.S. balanceof payments program on January 1, 1968. This

response took the form of an expressed willingnesson the part of these governments to accept theimpact of the new U.S. measures on their balanceof payments and reserves, and to counter thepotential impact of those measures on the level ofincome and on domestic liquidity. A striking fea-ture of European policies in 1968 has been thefostering of easy monetary conditions, which con-tinue to be necessary in the interest of internationalpayments equilibrium.

An essential task for the international adjust-ment process is to effect a substantial readjust-ment of the payments positions of the UnitedStates and the United Kingdom, through elimina-tion of their deficits. This readjustment, quiteobviously, cannot succeed without perseveranceon the part of the United States and the UnitedKingdom in the pursuit of policies directed towardthat end. In the longer run, the question willarise whether other countries, in Europe or else-where, will be satisfied with the cessation ofreserve increases or the reserve losses which thereadjustment may entail. Hence, action in thearea of reserve creation might well become anessential element in international cooperationaimed at achieving a lasting international paymentsequilibrium in a world environment of satisfactoryeconomic growth and of resumed progress towardliberalization of current and capital transactions.


Chapter 2

Proposed Amendment to the Fund's Articles of Agreement

URING the past fiscal year, for the first timein the Fund's history, proposed modifications

in the Articles of Agreement were submitted to theBoard of Governors for its approval. The Pro-posed Amendment of the Articles would add animportant function to the Fund's activities byestablishing a new facility based on special draw-ing rights. It would also make certain changes inthe present rules and practices of the Fund to takeaccount of developments in world economic condi-tions and the Fund's experience since the adoptionof the Articles of Agreement.

On April 16, 1968, the Executive Directorsproposed the introduction in the Articles of modi-fications that they had prepared in the form of theProposed Amendment on these two matters, andadopted an accompanying report. These weretransmitted to Governors. The relevant Resolutionwas adopted by the Governors on May 31, 1968.The Proposed Amendment must be accepted bythree fifths of the members, having four fifths ofthe total voting power, before it can enter intoforce, and for most members this involves legisla-tive action.

The Fund's Work on InternationalLiquidity, 1963 to 1968

The purposes for which the Fund was createdhave necessarily meant that problems relating tothe adequacy of liquidity in general and reserves inparticular have occupied the Fund during its wholehistory. Less than ten years after it began opera-tions, the Fund prepared a major report at therequest of the Economic and Social Council of theUnited Nations.1 Moreover, the Fund is requiredto focus on the subject of international liquidity atleast once every five years; Article III, Section 2,requires the Fund to review the quotas of membersat such intervals, and to propose an adjustment of

1 "The Adequacy of Monetary Reserves," published inInternational Monetary Fund, Staff Papers, Vol. Ill(1953), pp. 181-227.

quotas if it deems this appropriate. In addition,the Fund can and does agree to increase individualquotas at other times.

Starting with the Annual Report for 1963, theExecutive Directors have in each Report dealtwith international liquidity from the policy, ana-lytical, statistical, and technical points of view. Itmay be useful to indicate briefly a few majorthemes running through these Reports that foundfinal expression in the amendment now proposed.

The 1963 Report first introduced the concept ofthe gold tranche in the Fund as constituting part ofa member's international reserves, a concept forwhich the Proposed Amendment is intended toprovide additional legal strength. In this Reportthe adequacy of international liquidity was dis-cussed in terms of the Fund's purposes (on p. 49):

International liquidity is, of course, not an end initself. If the world is keenly interested in the questionof the adequacy and responsiveness of liquidity, it isbecause the proper level of liquidity is expected tocontribute to objectives such as those mentioned inArticle I of the Fund Agreement: the expansion andbalanced growth of international trade, the promotionand maintenance of high levels of employment andreal income, the development of the productiveresources of all members; exchange stability, orderlyexchange arrangements among members, and theavoidance of competitive exchange depreciation; amultilateral system of payments in respect of currenttransactions, and the elimination of foreign exchangerestrictions which hamper the growth of world trade.

This approach, it may be noted, is reflected inthe text of Article XXIV, Section l(a), in theProposed Amendment, which puts forward as gen-eral principles governing the allocation and cancel-lation of special drawing rights the attainment ofthe Fund's purposes as well as the avoidance ofeconomic stagnation and deflation and of excessdemand and inflation in the world.

In the 1963 Report, the point was also madethat it might be more important and feasible toconcentrate on the adaptation or enlargement ofthe existing multilateral arrangements through theFund than to seek to establish supplementary or

12

D


PROPOSED AMENDMENT TO THE FUND'S ARTICLES OF AGREEMENT 13

alternative arrangements outside, and it was antici-pated that the Fund would in due time take anyrequisite action or propose such action to itsmembers.

At the 1963 Annual Meeting of the Board ofGovernors, the Managing Director indicated thatthe Fund would intensify its studies of interna-tional liquidity and related questions; at the sametime, the Ministers and Governors of the Group ofTen 2 instructed their Deputies to make "a thor-ough examination of the outlook for the function-ing of the international monetary system and of itsprobable future needs for liquidity."

In its 1964 Annual Report, the Fund addresseditself to the fundamental issue of the relationbetween international liquidity and the process ofadjustment. It emphasized that the provision ofinternational liquidity—the means to finance dis-equilibria—should always be viewed in conjunc-tion with the process of payments adjustment, i.e.,the steps to eliminate disequilibria. This wouldrequire that each country, in addition to takingsuch specific policy measures in other fields aswould be appropriate to this end, would, in framingits general economic policies, take account notonly of the requirements of its domestic policyobjectives but also of fundamental trends in itsbalance of payments. This approach would involvea willingness on the part of countries in persistentpayments deficit to pursue less expansionary poli-cies than they would otherwise prefer, and on thepart of countries tending to run persistent sur-pluses to pursue more expansionary policies thanthey would have been inclined to adopt for purelydomestic reasons. The decisions with respect toeconomic policy adopted in 1968 by many indus-trial countries—which are described elsewhere inthis Report—indicate that these fundamental prin-ciples of the adjustment process are gaining wideracceptance by deficit and surplus countries alike.

The role that international liquidity can play inpromoting this process of adjustment was fullyrecognized in the 1964 Annual Report, although itwas stressed how difficult it might be to arrive at"collective judgment" regarding appropriate actionin the field of liquidity. With respect to the particu-lar action that might be taken at the time, the

2 I.e., the countries that had joined the GeneralArrangements to Borrow. These are Belgium, Canada,France, Germany, Italy, Japan, the Netherlands, Sweden,the United Kingdom, and the United States.

Fund's Annual Report for 1964 focused onincreasing international liquidity of a conditionalcharacter by means of quota increases, to bestudied in detail as promptly as possible after the1964 Annual Meeting; the same focus for immedi-ate action was contained in the Report issued bythe Deputies of the Group of Ten in the summer of1964. With respect to the potential contributionthat the Fund might make toward the supply ofunconditional liquidity, the Annual Report limiteditself to a brief and very tentative discussion ofpossible techniques.

In the course of the following year, the Execu-tive Directors proposed and the Governorsapproved an increase in Fund quotas from about$16 billion to close to $21 billion. Paralleling thisaction, the Executive Directors considered, in the1965 Annual Report, both the technical and thepolicy aspects of what then became known as"deliberate reserve creation," as distinguished fromthe creation of reserve positions in the Fund as aby-product of the extension of conditional creditby the Fund. These questions were also the subjectof intensive study during that year by the StudyGroup on the Creation of Reserve Assetsappointed by the Deputies of the Group of Ten,whose Report3 was published at about the sametime as the Fund's 1965 Annual Report.

In contrast to the exploratory character of theactivities carried on in 1964/65, the discussions in1965/66, by both the Executive Directors and theGroup of Ten, were directed toward finding thebasis for agreement among governments on a con-tingency plan for deliberate reserve creation whenit would be decided that a need for such actionexisted. Consideration was given to a number ofconcrete schemes under which such reserve crea-tion might take place. Among them were twoproposals put forward, for purposes of discussion,by the Managing Director. One of the proposedschemes was based on the extension of quasi-automatic drawing rights of the gold tranche typein the Fund, and the other on the issuance ofreserve units by a Fund affiliate whose membershipwould be open to all Fund members. Apart fromsuch differences as follow from these two techni-cally different approaches, both proposals wereguided by certain general considerations. Theseincluded the principle that international liquidity is

'• Also known as the Ossola Report; Mr. RinaldoOssola was Chairman of the Study Group.



the concern of all member countries and that allshould be entitled to participate, with due safe-guards, in the decisions on reserve creation and inthe distribution of newly created reserves, withsuch participation being based on members'quotas. The new facility to be created should beautomatic in character, but should be used only incase of balance of payments need, and all memberswilling to participate should also share in theobligation to accept transfers of the new assets.

The parallel discussion of these and a numberof other proposals in reports issued by the Fundand by the Deputies of the Group of Ten in thesummer of 1966 led to the decision, taken in Sep-tember of that year, for a direct exchange of viewsbetween the Executive Directors and the Deputies.The most suitable approach to this was found to bea series of joint, informal meetings. Four suchmeetings took place between November 1966 andJune 1967. They proved valuable in establishingclose contact between Executive Directors andDeputies, and led to the preparation of an agreedOutline of a Facility Based on Special DrawingRights in the Fund that was approved by theExecutive Directors in September 1967 and sub-mitted to the Annual Meeting of the Fund's Boardof Governors at Rio de Janeiro. In the course of1967 a number of suggestions had also been madefor possible changes in the Fund as it operates atpresent, in order to take account of present worldeconomic conditions and the experience of theFund over the last twenty years.

In a resolution adopted on September 29, 1967,the Governors requested the Executive Directorsto proceed with work relating both to the establish-ment in the Fund of a new facility and to possibleimprovements in the present rules and practices ofthe Fund, and to propose amendments of theArticles on these matters. After the Annual Meet-ing, Executive Directors devoted a large propor-tion of their time to the preparation of the pro-posed amendments requested by the Governorsand of the accompanying report. The full docu-ment, which was dispatched to Governors onApril 17, 1968, is reproduced in Appendix I ofthis Report. Governors were requested to vote onthe proposed Resolution not later than May 31.The Resolution was duly adopted. The ProposedAmendment, as noted earlier, will become effectiveafter it has been accepted by three fifths of themembers, having four fifths of total voting power.

The Proposed Amendment now before the Fundmembership, covers two broad subjects, of whichthe main features are set out below.

New Facility Based on SpecialDrawing Rights

The proposed new facility based on specialdrawing rights to meet the need, as and when itarises, for a supplement to existing reserve assetsreflects the basic principles that were developedover the years of study, preparation, and discus-sion. In this effort the Fund also benefited fromthe deliberations conducted in various groups andthe suggestions made by them. The establishmentof the facility requires, in addition to the accept-ance of the Proposed Amendment by the requiredmajorities, the participation of members havingquotas amounting to at least 75 per cent of totalFund quotas.

Only members of the Fund can become partici-pants in the facility. Allocations of special draw-ing rights will be made to individual participantsin proportion to their quotas in the Fund. Deci-sions to allocate will normally be made for five-year periods ahead, with allocations being made atyearly intervals. A participant may, however, electnot to receive allocations made under a decision ifit did not vote in favor of that decision.

Countries will be able to use the special drawingrights unconditionally whenever they have a bal-ance of payments or reserve need to do so. Cor-respondingly, participants will be obliged, when-ever designated to do so, to accept special drawingrights and in exchange to provide currency con-vertible in fact, a term which is defined in theProposed Amendment. A participant will nor-mally be designated for this purpose only when itsbalance of payments and gross reserve position issufficiently strong. The magnitude of the obliga-tion to accept is determined by the total amount ofspecial drawing rights allocated to the participantless any part thereof that has been canceled. Thisamount is termed the net cumulative allocation,and the participant's obligation to accept specialdrawing rights from other participants extends tothe point where its holdings of special drawingrights equal the amount received as its net cumula-tive allocation, plus twice this amount. As a resultof these provisions, participants will be able to use


PROPOSED AMENDMENT TO THE FUND'S ARTICLES OF AGREEMENT 15

the new special drawing rights in much the samemanner as they use their holdings of traditionalreserves.

In the elaboration of the provisions for thefacility, great care was taken that any decision toallocate special drawing rights should have broadsupport. Decisions on allocation can only be madeon a proposal by the Managing Director of theFund, concurred in by the Executive Directors,and approved by the Governors by an 85 per centmajority of the total voting power. The ProposedAmendment spells out the principles and consid-erations applying to any such proposal. The firstdecision to allocate special drawing rights will haveto take into account a collective judgment thatthere is a global need to supplement reserves, andthe attainment of a better balance of paymentsequilibrium, as well as the likelihood of a betterworking of the adjustment process in the future.

It has been provided that a participant's net useof its special drawing rights must be such that theaverage of its holdings of special drawing rightsover a five-year period will not be less than 30 percent of the average of its net cumulative allocationsof special drawing rights over the same period.Participants that have, during some part of anyfive-year period, used more than 70 per cent oftheir average net cumulative allocation may, there-fore, have to reconstitute their holdings in order toensure that their average use does not exceed thespecified proportion.

With the establishment of the new facility, theFund will maintain and conduct its operationsthrough two separate accounts. Operations andtransactions involving special drawing rights willbe conducted through the Special DrawingAccount, and the present operations and transac-tions of the Fund will be conducted through theGeneral Account. The Fund will meet the cost ofconducting the business of the Special DrawingAccount from the General Account, but these costswill be reimbursed to the General Account fromtime to time by assessments on participants to bepaid in special drawing rights. Special drawingrights can also be acquired by the Fund in theGeneral Account as a result of their use by mem-bers, in repurchases and in the payment of charges.The Fund will be able to use the special drawingrights which it holds in the General Account toreplenish its holdings of currencies and to makespecial drawing rights available, against gold or

convertible currencies, to participants that need toacquire them.

Each participant's holdings of special drawingrights are to be recorded in the Special DrawingAccount. The account of each participant will becredited with the amount of special drawing rightsallocated to it and debited in the event of a decisionto cancel special drawing rights. The use by aparticipant of its special drawing rights will resultin debits to its account and equivalent credits tothe accounts of one or more other participants. Itwill be noted that the functioning of the specialdrawing rights facility, in contrast to the operationsof the present Fund, will not be based on theFund's holdings of gold and member currencies.Special drawing rights will thus derive theirstrength, not from a pool of assets held by theFund, but from the acceptance obligations ofparticipants to provide exchange from their ownholdings to other participants entitled to use theirspecial drawing rights.

The Special Drawing Account will also recordthe Fund's holdings of special drawing rights heldin the General Account as well as those held byany other holder which the Fund may have pre-scribed.4

The value of special drawing rights is fixed interms of gold. A participant will earn interest onits holdings of special drawing rights, and will paya charge on the amount of its net cumulative allo-cation. The participant's position in the SpecialDrawing Account will determine whether, onbalance, it will receive interest or pay charges.The rate of interest and the rate of charge will bethe same; both will initially be \l/2 per cent, withsome room for later changes. Interest will becredited and charges debited to participants'accounts in special drawing rights.

Changes in Fund Rules and Practices

The changes in the rules and practices of theFund proposed in the form of certain amend-ments to the existing 20 Articles of the FundAgreement cover a number of provisions. First,there are changes in the majorities required forcertain important Fund decisions. Changes inquotas, insofar as they are the result of a general

4 These could include nonmember countries, membersthat are not participants, and institutions that performone or more functions of a central bank for members.



review of quotas, will require a majority of85 per cent of the total voting power, and the samemajority will apply in respect of decisions on cer-tain questions closely related to general quotaincreases, such as the question whether a memberwill be permitted to pay less than the standard25 per cent of its additional subscription in gold.5

An 85 per cent majority will also be required fordecisions adopted by the Fund under the provi-sions in the Articles that relate to a uniformproportionate change in par values.

Decisions requiring an 85 per cent majorityunder the Proposed Amendment, whether withrespect to the General Account or the SpecialDrawing Account, are to be taken by the Board ofGovernors.

There are a number of proposed changes relat-ing to the formal status of a member's entitlementto buy the currency of other members from theFund. Gold tranche purchases, which are nowpractically automatic, will become legally auto-matic under the new provisions. At the same time,the Articles will be amended to make explicit whathad been implicit before: that use of the Fund'sresources must be temporary in character and thatthe Fund must adopt policies to this end. Underthe new provisions, the Fund will no longer havethe legal power to make the use of Fund resourcesoutside of the gold tranche quasi-automatic andquasi-unconditional, in view of the availability ofthe new special drawing rights facility to take careof any need for additions to existing unconditionalreserve assets. On the other hand, these proposedchanges in the legal status of a member's entitle-ment to buy currency from the Fund in a transac-tion conducted through the General Account arenot intended to make the rules with respect to useof the Fund's resources more restrictive than theyare now.

The Proposed Amendment also provides for thepayment of remuneration to members that holdwhat has become known as a super gold trancheposition in the Fund.6 The rate of remunerationwill be ll/2 per cent per annum, but the ExecutiveDirectors would be authorized to make changes inthis rate.

5 Changes in quotas other than those resulting from ageneral review of quotas will continue to require approvalby the present majority of 80 per cent of the total votingpower.

6 The amount by which 75 per cent of a member'squota exceeds the Fund's holdings of its currency.

In addition, the Articles as amended will permitthe Fund to reduce or eliminate the service charge(presently at Vz per cent) on gold tranche pur-chases.

The Proposed Amendment calls for substantialchanges in repurchases governed by Article V,Section 7. These changes involve, inter alia, thetransition from a concept of monetary reserves netof currency liabilities to a gross concept. Thechanges can affect the amounts to be repurchasedand also the media in which repurchases are to bemade.

Finally, the Proposed Amendment envisages achange in the procedure to deal with questions ofinterpretation. Essentially, this change involvesthe creation of a Standing Committee on Inter-pretation of the Board of Governors, which willhave to consider any question of interpretationreferred to the Board of Governors at the requestof a member. The decision of this Committee willbe final unless the Board of Governors decidesotherwise by an 85 per cent majority of the totalvoting power. Each member of the Committee onInterpretation will have one vote.

The Proposed Amendment will require changesand additions in the By-Laws and in the Rules andRegulations as well as in some of the previous deci-sions of the Fund. In the course of the comingmonths, the Executive Directors intend to makeappropriate communications on these matters tothe Governors.

Conclusion

The broad impact of the new facility will be thatit will permit the Fund to assure an appropriatelevel of international reserves in the light of theneeds of the world economy, by supplementingthe existing reserve assets in the form of gold andreserve currencies. For the first time, therefore,the total stock of reserves and its rate of growthwill reflect deliberate international decisions ratherthan being determined solely by the availability ofgold for official reserves and the accumulation ofbalances in reserve currencies. At the same timethe present mechanism of the Fund, which pro-vides members primarily with liquidity of a condi-tional character, will continue to operate as in thepast. Thus the Fund will become a major sourcefor the supply of both unconditional and condi-tional liquidity.


Chapter 3

The Fund in 1967/68

HE year ended April 30, 1968 was unique inthe history of the Fund, not only in the degree

of activity but also in the nature and variety of thework undertaken. As a measure of activity, theExecutive Directors met more frequently duringthe year than in any other similar period and threetimes as often as the average for the years 1956/57to 1963/64. A substantial number of thesemeetings—74 in the period December 1, 1967 toApril 16, 1968—was devoted in whole or in partto the preparation of the Executive Directors'response to Resolution No. 22-8 of the Board ofGovernors, adopted in Rio de Janeiro on Sep-tember 29, 1967. This led on April 17, 1968 tothe transmission to Governors of the Directors'Report proposing amendment of the Fund'sArticles of Agreement: Establishment of a Facil-ity Based on Special Drawing Rights in the Inter-national Monetary Fund and Modifications in theRules and Practices of the Fund.1 Another periodof intense activity for staff and Directors came inNovember 1967 when, in the space of seven days,the Fund considered and concurred in proposalsfor the devaluation of the pound sterling, the cur-rencies of certain nonmetropolitan areas of theUnited Kingdom, and the currencies of 14 othermember countries.

The events related to the Proposed Amendmentand the November devaluations, of course, reflectonly part of the Fund's work in 1967/68. Duringthe year regular consultations were completed, bythe Executive Directors' consideration of staffreports, with a record number of member coun-tries. Stand-by arrangements in order to provideaccess to the Fund's resources were agreed formore members than in any previous year; drawingsunder the compensatory financing facility becamea frequently used procedure; and the total numberof financial transactions exceeded that in anyearlier year. Technical assistance to member coun-

tries, including the training programs of the IMFInstitute, increased further in scope and intensity.

While much work continues as before, newproblems arise to replace some of those that in thepast required so much attention. As this report iswritten, the Fund, in association with the WorldBank, is actively engaged in the preparation of thestudy of the problem of the stabilization of pricesof primary products for submission to the Boardsof Governors, in response to Resolutions adoptedat the 1967 Annual Meetings in Rio de Janeiro.2

1 See discussion in Chapter 2 and text in Appendix I(pp 129-74).

2 Resolution No. 22-9, Stabilization of Prices of Pri-mary Products, adopted by the Board of Governors ofthe Fund on September 29, 1967, reads as follows:

WHEREAS Governors of the Fund and the Bank forCameroon, Central African Republic, Congo (Brazza-ville), Ivory Coast, Dahomey, France, Gabon, UpperVolta, Madagascar, Mali, Mauritania, Niger, Senegal,Chad and Togo have transmitted to the ManagingDirector of the International Monetary Fund thefollowing request:

CONSIDERING the decisive importance of thestabilization of prices of primary products at aremunerative level for the economic advancementof the developing countries and the improvementof the standard of living of their populations, theGovernors meeting in Dakar request that in Riostudy be made of the conditions in which IMF,IBRD and IDA could participate in the elaborationof suitable mechanisms involving balanced commit-ments on the part both of the producing and ofthe consuming countries, and devote the necessaryresources thereto.

AND WHEREAS the Board of Governors recognizesthe importance of this subject in relation to thepurposes of the Fund;

Now THEREFORE the Board of Governors resolvesthat the Managing Director is hereby invited to havethe staff, in consultation with the Bank staff, preparea study of the problem, its possible solutions, and theireconomic feasibility, in the light of the foregoing, tobe submitted to the Executive Directors who arerequested to transmit it with such comments or recom-mendations as they may have to the Board of Gover-nors for consideration and appropriate decision by theBoard, if possible at its next Annual Meeting.

A parallel Resolution, with the same title, was adoptedby the Board of Governors of the International Bank forReconstruction and Development on the same date.

17

T



Membership and Quotas

One country, The Gambia, joined the Fund in1967/68, thereby raising total membership to107 and increasing total quotas by $5 million.From all sources, quotas rose by $198 million in1967/68, against increases of $1.5 billion in1966/67 and $3.4 billion in 1965/66. OnApril 30, 1968 total quotas were over $21.1 bil-lion.

Quotas continued to rise as a result of the gen-eral increase approved by the Board of Governorsin March 1965, with 2 countries taking up thewhole of the increase in their quotas provided forby the Governors' Resolution and 16 others thathad elected so to do increasing their quotas by oneor more installments. Most of the larger increasesprovided for in March 1965 had, however, takenplace before the opening of the past fiscal year, sothat the actions in 1967/68 added only $65 millionto total quotas, against $1,237 million in 1966/67.The most important source of increased quotas inthe past year was the part of the CompensatoryFinancing Decision that provides for sympatheticFund consideration of requests for quota adjust-ments by certain primary producing countries,particularly those with relatively small quotas.Increases by 5 countries under this provisiontotaled $128 million in the fiscal year, comparedwith no changes in 1966/67 and increases by 11countries totaling $106 million in 1965/66.

Changes in Par Values

For the first time since September 1949, theFund was faced with the task of dealing with asubstantial number of proposals for par valueadjustments. This occurred in November 1967,when the proposal of the United Kingdom for a14.3 per cent devaluation of the pound sterlingwas followed by proposals for devaluation by 14other member countries (including one that hadnot yet established a par value). The develop-ments surrounding these actions are detailed else-where in this Report.3

The experience and knowledge, gained throughclose contact with member countries over theyears, greatly facilitated the Fund's dealing withthe devaluations in November, and on three otheroccasions during 1967/68. On the basis of the

facts at its disposal, the Fund was able to satisfyitself that each of the proposed changes was neces-sary to correct a fundamental disequilibrium andto give its concurrence without any undue delay inaccordance with the Articles of Agreement. Thelimited extent of the November 1967 adjustmentreflected an encouraging degree of cooperationamong the Fund's members, and the adjustmentwas generally seen as introducing a better balanceamong the world's currencies without competitiveexchange depreciation. Fund counsel to membercountries during the hectic days of Novembercontributed to this result.

Fund Transactions

Purchases of currencies (or drawings) from theFund amounted to the equivalent of $1.3 billionduring the year ended April 30, 1968, but thisamount was more than offset by repurchases andother transactions with the same effect, so thatthere was a reduction of outstanding drawings by$0.5 billion over the fiscal year.

A large increase during the first three months of1968 brought total drawings for 1967/68 to thefigure of $1.3 billion. This amount exceeded thedrawings of $1.1 billion in 1966/67, but wasbelow the levels of three earlier years, 1961/62,1964/65, and 1965/66. Although the amountdrawn during 1967/68 was large, three types oftransaction had the effect of reducing the amountof drawings outstanding at the end of the year.First, member countries in the course of the yearrepurchased Fund holdings of their currencies tothe extent of $1.1 billion. Second, the use of cur-rencies of which the Fund's holdings were in excessof 75 per cent of the members' quotas, in purchasetransactions and in repayment of Fund borrowings,reduced the amount of outstanding drawings ofthese members—and thus the total of outstandingdrawings—by $0.5 billion. Third, a drawing inthe super gold tranche is not subject to repurchaseunder the Articles of Agreement and, while it addsto amounts drawn, it is, therefore, not consideredpart of outstanding drawings; an operation of thisnature amounted to $0.2 billion in 1967/68.4 The

3 See pages 50-51.

4 A drawing, or that part of a drawing, that is in thesuper gold tranche does not increase the Fund's holdingsof the purchasing member's currency above the level of75 per cent of its quota. About half of the Canadiandrawing in February 1968 was in the super gold tranche.


THE FUND IN 1967/68 19

various transactions thus produced the reductionof outstanding drawings by $0.5 billion during thefiscal year, to the equivalent of $4.6 billion onApril 30, 1968.

While outstanding drawings declined, amountsthat had not been drawn under stand-by arrange-ments existing at the end of the fiscal year rose by$1.6 billion between April 30, 1967 and April 30,1968 to a record of $2.0 billion, so that the sum ofthese amounts and outstanding drawings rose by$1.1 billion, to $6.6 billion, the highest recordedyear-end level.

Since the end of the fiscal year, two particularlylarge transactions have taken place. In June 1968,France made a gold tranche drawing 5 equivalentto $745 million and the United Kingdom drew thefull amount of $1,400 million available under itsstand-by arrangement.6 In connection with eachdrawing, the General Arrangements to Borrow(GAB) were activated, and the Fund replenishedits holdings of currencies drawn by sales of gold.Borrowings and gold sales totaled $741 millionand $547 million, respectively, in connection withthe two drawings. As a result of these and otheroperations, outstanding drawings rose by $ 1.1 bil-lion to $5.7 billion between April 30 and June 30,1968.

Considering in more detail the transactions thattook place in the fiscal year ended April 30, 1968,the largest drawings were made by Canada andthe United States. In February 1968 Canadadrew the equivalent of $391 million, all withinthe gold tranche, raising the Fund's holdings ofCanadian dollars to 100 per cent of quota. Inaddition, the Fund repaid its $35 million indebted-ness to Canada under the GAB. The drawing ofthe equivalent of $200 million by the United Statesin March 1968 was also within the gold trancheand approximately equaled the total of the U.S.dollars used by the Fund in the Canadian opera-tions just described. Other purchase transactionsin 1967/68 that were not under stand-by arrange-

n A gold tranche drawing does not increase the Fund'sholdings of the purchasing member's currency above100 per cent of its quota. A gold tranche drawing mayinclude a drawing in the super gold tranche; the latteraccounted for two thirds of the drawing by France.

6 Also in June 1968, the Fund consented to a proposalby France to transfer its claim on the Fund under theGeneral Arrangements to Borrow (GAB) to four otherGAB participants. The amount involved was equivalentto $140 million. This redistribution of claims on the Fundhad no effect on the total of Fund borrowing outstanding.

ments or the Compensatory Financing Decision,and not related to quota increases, amounted tothe equivalent of $90.5 million, drawn by 5 lessdeveloped countries.

Next in importance during the year were pur-chases equivalent to $441 million under stand-byarrangements. All of this amount was drawn by23 primary producing countries, most of them lessdeveloped countries. The extent to which membercountries obtained support for their policies bythese arrangements, providing access as neededto the Fund's resources, far exceeded the amountdrawn. During the fiscal year the Fund approveda record number of 32 new stand-by arrangementsfor a total of $2,352 million. The largest sucharrangement, equivalent to $1,400 million, wasapproved for the United Kingdom in November1967; as has been noted, the full amount wasdrawn in June 1968, after the end of the fiscal year.All the other stand-by arrangements approved in1967/68 were for primary producing countries,most of them less developed primary producingcountries; on 27 of these arrangements $618 mil-lion had not been drawn on April 30, 1968.7

The Fund's compensatory financing facility wasincreasingly used in 1967/68 to assist primaryproducing countries which experience temporaryshortfalls in their export proceeds through cir-cumstances largely beyond their control. Nine pri-mary producing countries affected by adverseexport conditions drew the equivalent of $194 mil-lion under the facility. In addition, 3 countriesobtained the agreement of the Fund to reclassifyas compensatory drawings a total of $26 millionpreviously obtained in other purchase transactions,as provided for under the Fund's Decision asamended in September 1966. Drawings under theamended compensatory facility are separate fromothers in the sense that they are not taken intoaccount in determining the member's ability todraw under the normal policies governing the useof the Fund's resources. Including the three reclas-sification cases, 6 members made both compensa-tory and other drawings in the course of 1967/68.

Repurchases of $ 1.1 billion during the past yearreflected to a considerable degree two repur-chases by the United Kingdom, the equivalent of$405 million in May 1967 and $250 million in

7 Details of amounts drawn under stand-by arrange-ments and of arrangements approved in 1967/68 aregiven in Tables 30 and 31 (pp. 99 and 100).



November 1967. On the occasion of the former,the Fund repaid the same amount that it hadborrowed under the GAB when the United King-dom made a purchase in respect of which it wasrepurchasing in May 1967. Repurchases by 39primary producing countries totaled $461 millionin 1967/68.

The number of currencies that are used indrawings on the Fund and in repurchases hascontinued to grow. In 1967/68 the currencies ofIreland and South Africa were used for the firsttime, and, by the end of April 1968, a total of 22currencies had been sold since the Fund's incep-tion, compared with 16 at the end of 1965 and8 at the end of 1960. The ability of the Fund touse a greater number of currencies for drawingsadds to the Fund's effective liquidity and leads toa broader distribution of reserve positions in theFund. This process has been helped by the factthat more and more members who hold goldtranche positions have come to look upon thesepositions as a part of their reserves, and to con-sider the use of their currencies in drawings fromthe Fund as a change in the composition of theirreserves. The Fund has also widened the numberof currencies that are used in repurchases, as morecurrencies have become formally convertible underArticle VIII of the Fund Agreement and can,therefore, be used in repurchase by other members.At the present time, U.S. dollars and poundssterling cannot be accepted by the Fund in repur-chase since the Fund's holdings of these currenciesare in excess of 75 per cent of the respectivequotas. Since members do not normally hold intheir reserves large amounts of currencies presentlyacceptable by the Fund in repurchase, they mayhave to acquire them against payment in reservecurrencies when repurchasing.

In recent years large Fund sales of currenciesof surplus countries have reduced its holdingsof these currencies to successively lower levels.On April 30, 1968 the Fund's holdings of thecurrencies of 6 members, namely, Austria, Bel-gium, France, Germany, Italy, and the Nether-lands, were about 19 per cent of their combinedquotas. In 1967/68 the Fund used these cur-rencies in the equivalent of $661 million in draw-ings and $372 million in repayment of borrowingsunder the GAB; however, the effects on the Fund'sholdings were largely offset by the use of the 6

currencies in the amount of $888 million inrepurchases by other members.

The Fund has at the same time increasinglysold currencies of members that have drawingsoutstanding from the Fund as improvements intheir balance of payments and reserve positionspermitted. Such sales reduce the outstanding draw-ings of these members and have, therefore, thesame effect on their Fund positions as repurchasesby them. During the past fiscal year Argentinepesos, Brazilian new cruzeiros, and Irish pounds,totaling the equivalent of $53 million, have thusbeen used.8 During the same period, poundssterling, amounting to the equivalent of $152 mil-lion, and U.S. dollars, amounting to $337 million,have been used in a similar fashion, partly forthe convenience of members wishing to makesmall drawings in their reserve currencies. Salesof sterling, together with U.K. repurchases ofsterling from the Fund, reduced the United King-dom's outstanding drawings by the equivalent of$807 million during the fiscal year, to $1,508 mil-lion on April 30, 1968. The effect of sales ofU.S. dollars, the use of $16 million in that cur-rency in the Canadian GAB repayment, and draw-ings equivalent to $200 million by the UnitedStates was to reduce outstanding U.S. drawingsby $153 million, to $728 million.9

The Fund has also used the currencies of othermember countries, of which its holdings were, atthe time of the drawing, at or below 75 per centof the respective quotas but relatively larger thanthose of the six surplus countries listed above.Drawings of these currencies totaled the equivalentof $145 million in 1967/68, including $53 mil-lion of Australian dollars, $20 million of SouthAfrican rand, $19 million of Norwegian kroner,$15 million of Swedish kronor, and $13 million ofMexican pesos. In addition, the equivalent of$52 million was used in the repayment of GABborrowings. The use of currencies of this group ofcountries in drawings and repayment of borrow-ings was, however, exceeded by amounts receivedby the Fund in repurchases, the equivalent of

8 Excludes the equivalent of $10 million of Irish poundsdrawn after the Fund's holdings of the currency werereduced to 75 per cent of Ireland's quota.

9 On June 30, 1968, after drawings by France, theUnited Kingdom, and other members, outstanding draw-ings of the United Kingdom and the United States werethe equivalent of $2,908 million and $313 million,respectively.


THE FUND IN 1967/68 21

$203 million in the year ended April 30, 1968.10

At the end of April 1968, the Fund's hold-ings of currencies designated for use in draw-ings,11 other than pounds sterling and U.S. dollars,amounted to $2.7 billion, and its gold account,including general deposits of gold and invest-ments in U.S. Government short-term securities,amounted to $3.8 billion. On the same date$2.0 billion had not been drawn under stand-byarrangements then existing, and members main-tained reserve positions in the Fund amountingto $5.8 billion. The outstanding borrowings ofthe Fund under the GAB and from Italy, part ofmembers' reserve positions in the Fund, amountedto $740 million, while the lines of credit not bor-rowed under the GAB were $5.4 billion.

Consultations and Technical Assistance

Apart from its financial transactions with mem-bers, a substantial amount of the work of the Fundis concerned with problems and developmentsspecific to individual member countries. Much ofthis work is done in the countries concerned.During the fiscal year 1967/68, members of theFund staff visited 100 countries to conduct regularconsultation discussions, to discuss the countries'problems, to help in the formulation of stabiliza-tion programs and the preparation of requests forstand-by arrangements, to conduct reviews of theseprograms and arrangements, and to provide tech-nical assistance. A substantial portion of suchassistance involved advice on and help in dealingwith the banking and fiscal problems faced bydeveloping countries. But it also covered adviceon exchange policies, the operation of exchangesystems, and the development of balance of pay-ments and financial statistics.

The growth in the Fund's membership hasbrought an increase in regular consultation activity.In 1967/68, 69 Article VIII or Article XIV con-sultations were completed with a record numberof 67 member countries.

Since the beginning of the Article XIV consulta-tions in 1952, the Fund and its members haveheld this activity to be of great value. The discus-

10 Repurchases during the fiscal year also included theequivalent of $24 million in gold. (See Table 34, p. 104.)

11 See Supplementary Note A, pages 104-105.

sion and analysis of the member's problems andpolicies by the staff, and their consideration bythe Executive Directors, can and does facilitatethe solution of problems, the removal of practicesharmful to other countries, and the developmentof policies that contribute to strengthening thecountry's economic position. At the same time,the continuing process provides the Fund witha body of information which enables it to dealmore promptly and more expertly with a requestfor the use of the Fund's resources, a proposal fora change in a par value, or a proposed modificationof an exchange system. The assembled informa-tion is often of considerable use to the memberand aids the Fund in its consultations with otherinternational organizations considering the eco-nomic problems of countries.

On the basis of this experience, in 1960 theconsultation process was extended to Article VIIIcountries, countries which have accepted the con-vertibility obligations of the Fund Agreement.Over the years the number of these countries hasgrown. In the past fiscal year, 3 more membersaccepted the obligations of Article VIII—Bolivia,Denmark, and Norway—bringing the total to 31out of the Fund's membership of 107.

Technical assistance supplied by members of theFund staff directly to member countries increasedsignificantly in 1967/68. Assistance was also pro-vided by the Fund through outside experts princi-pally in the fields of banking and fiscal affairs.This assistance continued to increase and, onApril 30, 1968, 60 such experts were on assign-ment in 30 countries, mostly for six months ormore. About one fourth of the long-term assign-ments undertaken in the central banking programsince its inception in 1964 have been completed,and there are indications that the number of newrequests is leveling off following the very rapidgrowth of the preceding two years. On the otherhand, the fiscal program, which has grown at aslower rate, is continuing to expand with theincreasing demand for advisors.

Technical assistance provided at the Fund'sheadquarters through training courses offered bythe IMF Institute also expanded in 1967/68,with the introduction of a course on public finance,the addition of a course on financial analysis andpolicy given in Spanish, and the extension of somecourses.



As in previous years, the Fund organized aseries of lectures and discussions in Washingtonfor a group of trainees from the Centro de EstudiosMonetarios Latinoamericanos (CEMLA) in con-nection with their program on central banking andmonetary policies and provided staff lecturers forthe CEMLA program on financial analysis andproblems in Mexico City. A seminar for Brazilianuniversity professors of economics was held inRio de Janeiro, jointly with the International Bankfor Reconstruction and Development (IBRD),just prior to the 1967 Annual Meetings; the Fundalso conducted a seminar for professors from

French-speaking countries in Europe and nearbyAfrica in Aix-en-Provence in November 1967.

During the year, the Fund again organizedmeetings for the review of Ghana's aid require-ments, while staff representatives participated inand provided documentation for meetings ofIndonesia's donors and creditors convened by theNetherlands and France. Staff members also tookpart in meetings of consortia and consultative andother groups considering the coordination of aid toindividual countries, held under the auspices ofthe IBRD or the Organization for Economic Coop-eration and Development.

Proposed Distribution of Net Income

On August 7, 1968, at a late stage in the prepa-ration of this Report,, the Executive Directorsagreed to recommend to the Board of Governorsa distribution of net income. As indicated onpage 111 in Supplementary Note A, net incomeearned in the fiscal year ended April 30, 1968amounted to $55,743,725, which had been trans-ferred provisionally to the General Reserve. TheExecutive Directors' recommendation proposedthat $18,285,244 of this net income be allocatedto the General Reserve and that the remainder,equal to $37,458,482, be distributed to members

at a rate of 11/2 per cent on the amount by which75 per cent of each member's quota exceeded theaverage of the Fund's holdings of the member'scurrency during the fiscal year ended April 30,1968, i.e., to members that had a super goldtranche position in the Fund during the past fiscalyear. This recommendation to the Board of Gov-ernors is being submitted for action at its AnnualMeeting, September 30 to October 4, 1968. Ifapproved, this will be the first occasion on whicha distribution of net income will have been madeunder the provisions of Article XII, Sections 6(a)and (b), of the Fund Agreement.


Part II

REVIEW OF THE YEAR


Chapter 4

World Trade, Payments, and Reserves

World Trade

Principal Changes

HE value of world trade rose by 5 per centin 1967, about one half the growth rate

achieved in the three previous years (Table 1)and close to the lowest annual increase in thisdecade. The unit value of trade declined slightlyfrom 1966 to 1967, reversing the trend that hadprevailed since 1962, and the deceleration in thegrowth of trade was therefore less pronounced involume terms than in value. It is estimated that the

volume of trade increased by 5% per cent from1966 to 1967, compared with 7% per cent in theprevious year.

The slowdown of trade, which was particularlymarked from the third quarter of 1966 until thethird quarter of 1967, can be traced largely tothe easing of demand conditions in Europe and,later and more briefly, in North America. In total,industrial-country imports rose by 6 per cent invalue from 1966 to 1967, a smaller increase thanin any year since 1961. The exports of industrialcountries increased at about the same rate as their

TABLE 1. GROWTH IN VALUE OF IMPORTS AND CHANGES IN TRADE BALANCES OF MAJOR AREAS, 1964-67

(Changes from preceding period, at annual rates) a

1964 1965

Growth in value of imports

World2 12 9

Industrial countries 12 9North America 10 15Continental Europe 12 9United Kingdom 14 1Japan 18 3

(Industrial countries'imports from primaryproducing countries) (11) (4)

Primary producingcountries 12 9

Changes in trade balances 3

Industrial countries4 0.8 0.6

Primary producingcountries —1.4 —2.1

Total, industrial andprimary producingcountries45 —0.6 —1.5

1966

10

111993

17

(8)

7

-1.3

-1.3

1966

1967Firsthalf

Secondhalf

Per cent

6637

22

(4)

102072

17

(9)

Billion U.S. dollars

-0.3

-0.1

-0.4

-1.2

0.6

-0.6

145

24

(5)

10

0.6

— 1.5

-0.9

1967

Firsthalf

431

1320

(3)

2.1

— 1.3

0.8

Secondhalf

5351

22

(5)

-5

-4.7

4.0

-0.7

Sources: International Monetary Fund, International Financial Statistics; Organization for Economic Cooperationand Development, Over-All Trade by Countries; Fund staff seasonal adjustments.

1 Half-yearly figures are seasonally adjusted changes from the previous half year, and the average of these changeswill therefore differ from the annual changes shown in the left-hand part of the table.

2 Excluding CMEA countries, mainland China, etc. (see footnote 1, p. 27).8 Trade balances are based on customs data, exports f.o.b. less imports c.i.f.4 Excludes U.S. Department of Defense shipments.5 Figures reflect changes in balances of trade with CMEA countries, mainland China, etc., changes in expenditures on

insurance and freight, and miscellaneous statistical discrepancies.

25

4 4 5

5 8 9 5 2

T

8



CHART 4. INDUSTRIAL COUNTRIES: VALUE OF IMPORTS AND INDUSTRIAL PRODUCTION, 1964-FiRST QUARTER 1968

(1963 = 100; seasonally adjusted)

'Country indices weighted by total imports in 1963.


WORLD TRADE, PAYMENTS, AND RESERVES 27

imports, inasmuch as the slowing of their importsfrom primary producing countries was matched,for 1967 as a whole, by a slowing of their exportsto these countries. The value of total imports ofprimary producing countries rose by 4 per centfrom 1966 to 1967, about the same as the increasein their exports.1

Although the annual trade balance of industrialcountries and of primary producing countries,taken as groups, thus changed little from 1966 to1967, there were major swings in the balances ofthe two areas during this period of slowdown inworld trade. The trade balance of industrial coun-tries improved considerably in late 1966 and thefirst half of 1967, when the growth of their im-ports from primary producing countries was slack-ening and their exports to these countries con-tinued to rise at a faster pace. In the second halfof 1967 and early 1968, the renewed growth ofindustrial-country imports from primary produc-ing countries, together with an abrupt fall in theimports of those countries, led to a large declinein the industrial countries' trade balance and a

1 For convenience of analysis this Report employs theclassification, industrial countries and primary produc-ing countries. Industrial countries in this grouping areAustria, Belgium, Canada, Denmark, France, the Fed-eral Republic of Germany, Italy, Japan, Luxembourg,the Netherlands, Norway, Sweden, Switzerland, theUnited Kingdom, and the United States; primary pro-ducing countries are all of the remainder with theexception of CMEA countries, mainland China, etc.,generally not covered in the Report because of theabsence of data. (Members of the Council for MutualEconomic Assistance are Albania, Bulgaria, Czechoslo-vakia, Eastern Germany, Hungary, Mongolia, Poland,Rumania, and the Union of Soviet Socialist Republics.In addition to these countries and mainland China, theterritories generally not covered include Cuba, NorthKorea, and North Viet-Nam.) The category of primaryproducing countries is subdivided into more developedcountries (Australia, Finland, Greece, Iceland, Ireland,New Zealand, Portugal, South Africa, Spain, Turkey,and Yugoslavia) and less developed countries (allothers).

It is recognized that no simple classification, such asthat adopted in this Report, can reflect the full natureof each economy. For example, industrial countries, suchas Canada and the United States, are also important pro-ducers and exporters of primary products; some countriesclassified as primary producers, such as Australia, havesignificant industrial capacity; and, in a few instances,some less developed primary producing countries mayhave relatively high per capita incomes.

For some purposes in this Report, it has also beenuseful to distinguish between developed countries andless developed countries. When this is done, the termdeveloped countries covers both industrial countries andmore developed primary producing countries.

corresponding reversal of the earlier deteriorationin the balance of the primary producing countries.

Impact of Economic Activity on Trade

The development of imports into industrialcountries was clearly related to underlying shiftsin economic activity, as indicated in Chart 4 byseasonally adjusted industrial production. Germanimports reached a peak in the early part of 1966and then declined well into 1967 in line with thefall in industrial production. In most other conti-nental European countries, production and importsgrew more slowly or declined during this period,although the changes were generally later and lessmarked than in Germany. During the second halfof 1967 and the first part of 1968, the renewal ofeconomic growth led to a strong recovery ofimports into Germany and most of the Europeancountries that had experienced stagnant or declin-ing output in 1966 and earlier in 1967. The mainexceptions in Europe to this cyclical pattern wereItaly and the United Kingdom. In Italy the rapidgrowth of industrial production continued untilmid-1967 and then became erratic; importsincreased through 1967 and declined in the firstquarter of 1968. The development of imports intothe United Kingdom was greatly influenced by theremoval of import surcharges in November 1966;this caused imports to be postponed and to risesharply in the first part of 1967 despite the rela-tively flat trend of industrial production. U.K.imports rose again in late 1967 and early 1968.

In Japan strong economic growth continued in1967 and supported a further rapid increase inimports throughout the year. However, the strongrising trends of production and imports have beeninterrupted in 1968 under the impact of the poli-cies of restraint adopted by the Japanese authori-ties.

Import demand in the United States had alsoexpanded with domestic activity during 1966, butduring the first half of 1967, when total outputwas rising more slowly and industrial productionfell below the level of late 1966, a decline in U.S.imports was added to the weakness that hadalready developed in European markets. In thefourth quarter, U.S. imports again began to risestrongly and continued to do so in the earlymonths of 1968. Although this rise, like that



CHART 5. TRADE FLOWS BETWEEN SELECTED INDUSTRIAL COUNTRIES AND AREAS, 1964-FmsT QUARTER 1968 '

(1964 — 100; seasonally adjusted}

1 Based on export data.2 Excluding the United Kingdom and Portugal.8 U.K. seamen's strike.4 Removal of U.K. import surcharge.r> U.S. dock strike.



which had emerged in Europe, mainly reflectedthe renewed upsurge of output, the U.S. importlevel was inflated at the end of 1967 and early in1968 by some temporary influences, particularlyan unusually large volume of metal imports re-lated to the copper strike and to anticipation of apossible strike in the steel industry.

The earlier downturn of imports in Germanyand the United States strongly conditioned thepattern of trade flows among the industrial coun-tries (Chart 5). The slowdown of demand inGermany—which was of central importance inEuropean developments—led to a striking declinein its imports from other EEC countries frommid-1966 until late 1967. Other flows of tradeamong EEC countries, including exports fromGermany, continued to increase but at a lessrapid pace than before, reflecting not only theimpact of the German recession on economicactivity in the other EEC economies but also theslow growth of domestic demand in France, Bel-gium, and the Netherlands. As trade among EECcountries slowed down, exports from the conti-nental EFTA countries to the EEC also tended todecline; trade in the opposite direction had in-creased in late 1966 but drifted downward throughthe first three quarters of 1967.

The over-all sluggishness of industrial marketson the European continent during most of 1967was an important part of the export picture formany countries outside this area—but most espe-cially for the United Kingdom, whose exports toEurope declined throughout 1967 while its im-ports from Europe were rising sharply. The steepupward trend of Europe's exports to the UnitedStates during 1965 and 1966 was abruptly re-versed during the first three quarters of 1967 and,in line with the easing of demand pressures in theUnited States at that time, U.S. exports to Europe(to the EEC as well as to the United Kingdom)rose markedly during the first half from their lowlevel in late 1966. These developments produceda substantial but temporary improvement in theU.S. balance of trade with Europe, but they alsoadded to the deflationary tendencies on the Euro-pean continent and aggravated the United King-dom's external difficulties. Japan's exports to theUnited States slowed down early in 1966, coin-ciding with the upsurge of domestic demand inJapan, and declined during the first half of 1967.Trade between the United States and Canadaleveled out or declined through most of 1967.

The recovery in the trade of industrial countriesthat began during the second half of 1967 andcontinued into 1968 was, like the earlier slow-down, particularly marked in the imports of theUnited States and Germany. However, the importsof most other industrial countries recovered moreor less simultaneously in an unusually strongsurge of industrial-country trade. The imports ofJapan and Italy continued to rise strongly in thesecond half of 1967 but the growth was inter-rupted in early 1968.

The value of industrial-country imports fromprimary producing countries had leveled off to-ward the end of 1966 and increased relatively littlefor almost a year (see Chart 20). The slackenedintensity of demand in the industrial countries cutback the growth in volume of their imports, andthere was also a tendency for commodity pricesto decline through most of 1967 (see Charts 21and 22). The latter development, in turn, wasreflected in the unit values of exports from primaryproducing countries and in their terms of trade,which from 1966 to 1967 deteriorated substan-tially in most primary producing areas. Theyear-end upswing of demand in the industrialcountries brought with it some strengthening ofcommodity prices, and the value of industrial-country imports from most primary producingareas increased strongly in the fourth quarter of1967.

The movement in total exports of primary pro-ducing countries (Chart 6) was broadly similar tothat in their export trade with the industrialworld. There was little change in the level of theirexports from the third quarter of 1966 throughmost of 1967, except for a sharp increase inexports from the Middle East after the hostilitiesthere. The increase from 1966 to 1967 in exportsfrom all primary producing countries was only 3per cent, compared with 8 per cent in the previousyear. These data reflect mainly the behavior ofexports from the less developed countries; by andlarge, the more developed primary producingcountries fared much better, and the rise in theirtotal exports from 1966 to 1967, amounting to8 per cent, was almost as large as that in theprevious year.

There was a tendency for imports of primaryproducing countries to decline in the second halfof 1967, bringing about a marked improvement in



CHART 6. TRADE OF PRIMARY PRODUCING COUNTRIES,1963-FiRST QUARTER 1968

(1963 = 100; seasonally adjusted}

trade balances during the year. The developmentson the import side reflected, to a considerableextent, adjustments to declines in export earnings.This was especially so for some countries in Africaand Latin America, where the authorities at-tempted to meet deteriorating payments situationsby measures ranging from devaluation to importcontrols. But in many of the primary producingcountries the upward movement of importsthrough the first half of 1967, and the subsequentdecline, can be attributed to other factors: ab-normal food shipments to Asia in the first part of1967, fluctuations in U.S. strategic shipments toSoutheast Asia, and, during the second half of1967, the disruption of Europe's trade with manydeveloping countries caused by the closing of theSuez Canal and the U.K. dock strike. The U.S.dollar value of imports into primary producingcountries was also reduced late in the year as aconsequence of the devaluation of sterling andcertain other currencies.

Chapter 6 includes a fuller discussion of thetrade of primary producing countries in 1967.

Exports and Trade Balances of IndustrialCountries

As a consequence of the much reduced rate ofindustrial expansion and the slower growth ordecline in the imports of primary producing coun-tries, the export markets of almost all industrialcountries rose considerably less from 1966 to1967 than from 1965 to 1966 (Table 2). Dispari-ties in the growth of different countries' exportmarkets were much smaller than from 1965 to1966, ranging from 4 per cent to 7 per cent, compared with 6 per cent to 17 per cent. The growthof export markets from 1966 to 1967 was par-ticularly small for countries that direct a largepart of their exports to Germany. Germany's ownexport markets increased relatively rapidly, andthe strong increase in the United Kingdom's im-ports that followed removal of import surchargeswas an important factor in the favorable marketgrowth experienced by Sweden and Denmark.

TABLE 2. INDUSTRIAL COUNTRIES: GOWTH OF EXPORTMARKETS AND EXPORTS, 1966 AND 1967

(Percentage changes from preceding year; countries ranked bygrowth of exports in 1967)

All industrialcountries 2

NorwayCanada

GermanyItalyNetherlandsJapanAustriaSwitzerlandSweden

United States 2

FranceBelgium-LuxembourgDenmarkUnited Kingdom

1965

Marketgrowth *

10.3

617

1198

138

119

118979

to 1966

Increasein exports

10.3

818

13126

165

118

108767

1966 to 1967

Market Increasegrowth a in exports

5.6

55

7456657

64476

5.6

1110

8887776

5433

— 2

Source: International Monetary Fund and International Bank forReconstruction and Development, Direction of Trade.

1 For the purpose of calculating average growth in geographicmarkets, the world has been divided into 24 markets, consisting of14 industrial countries, 9 groups of primary producing countries,and CMEA countries, mainland China, etc. The average growth inthe market confronting each exporting country is taken to be thegrowth in each market weighted according to the share of thecountry's total exports going to that market. Except for CMEAcountries, mainland China, etc., the growth in each market istaken to be the growth in the total exports of industrial countriesto that market area. For each exporting country, the growth of themarket in CMEA countries, mainland China, etc., is taken to bethe actual growth in its exports to those areas.

2 Excluding U.S. strategic exports, mainly to Southeast Asia, forwhich data on the country of destination are withheld. Such exportsincreased sharply from 1965 to 1966 and fell sharply in 1967.Including such shipments, the actual growth of U.S. exports was11 per cent from 1965 to 1966 and 4 per cent from 1966 to 1967.



For most countries, the smaller rise of exportsfrom 1966 to 1967 than from 1965 to 1966 wasroughly in line with the decline in the rate ofgrowth of their export markets, with little evidentchange in export performance. The large increasein Norway's exports relative to the growth of itsmarkets was accounted for by the timing of shipdeliveries. There was an unusually rapid increasein Canada's exports from 1966 to 1967, as aconsequence of larger exports of automobiles andparts under the agreement with the United States.The agreement also led to a sizable increase inU.S. exports to Canada, but this was not sufficientto arrest the moderate declining trend in the U.S.share of industrial-country exports.

The United Kingdom's exports have grown lessrapidly than its export markets for a number ofyears. In 1967, the decline of 2 per cent in theUnited Kingdom's exports, while its markets ex-panded by 6 per cent, was to a considerable extentattributable to the impact of the dock strikes, theclosing of the Suez Canal in the second half ofthe year, and to the effect of the devaluation of

sterling in reducing the U.S. dollar value of ex-ports in November and December. However,apart from these special factors, some weakeningof the U.K. export performance in industrialmarkets had already become evident in the latterhalf of 1966 and intensified in the first half of1967, as export availabilities in Germany, theUnited States, Sweden, and some other countriesimproved.

As a result of the various changes in the patternof world trade, there were major shifts in thetrade balances of Germany, Japan, and the UnitedKingdom from 1966 to 1967 (Table 3). Thewidening of Germany's merchandise surplus by$2.3 billion was more than matched by reductionsof $1.5 billion in the trade positions of both theUnited Kingdom and Japan. Among the otherEEC countries, there was virtually no change inthe trade balance of France, and a decline of $0.4billion in the Italian balance was nearly equaled byincreases in those of Belgium-Luxembourg and theNetherlands. There were also small changesamong the other European industrial countries.

TABLE 3. INDUSTRIAL COUNTRIES: GROWTH IN VALUE OF EXPORTS AND CHANGESIN TRADE BALANCES, 1966 AND 1967

(Changes from preceding year or half-year; half-year figures seasonally adjustedand expressed as annual rates)

1966 1967

1966

Firsthalf

1967

Secondhalf

Firsthalf

Secondhalf

Per CentGrowth in value of exports

United States l

Canada

EFT A countries -of which United Kingdom

EEC countriesof which Germany

Japan

Total

Changes in trade balancesUnited States 'Canada

EFTA countries L>

of which United Kingdom

EEC countriesof which Germany

Japan

Total

1018

77

1013

16

10

-1.8—

0.30.4

0.21.7

—

-1.3

510

2-2

78

7

6

0.20.2

-1.4-7.5

2.22.3

-1.5

-0.3

717

4—

813

23

9Billion US.

-1.50.1

-0.1. ,0.8

0.3

-1.2

614

914

915

12

9dollars

-0.80.1

0.61.0

1.21.9

-0.5

0.6

1017

7/

76

5

8

1.20.3

-0.5-1.0

1.91.4

-0.7

2.1

— 4-6

-13-23

45

6

-2

-0.9-0.3

-2.1-1.9

-0.5-0.1

-1.0

-4.7

Sources: International Monetary Fund, International Financial Statistics, and staff seasonal adjustments.1 Excludes U.S. Department of Defense shipments. Including these shipments, the U.S. trade balance declined by

$0.2 billion from 1966 to 1967.2 Excluding Portugal.



In the early months of 1968 the Japanese tradebalance improved substantially as the policies ofrestraint beg^n to take hold, and there was also animprovement in Italy's trade balance. In theUnited Kingdom, however, imports continued torise, and, despite a strong recovery in the dollarvalue of exports from the very low fourth-quarterlevel, the trade balance in the first five months of1968 was little different from its average level inthe second half of 1967. In the United States astriking decline in the trade balance in the lastquarter of 1967 was extended into 1968. In thefirst five months of 1968 the trade surplus (sea-sonally adjusted) was at an annual rate of $1.0billion, in contrast to a rate of $4.7 billion for thefirst three quarters of 1967. While the level ofimports in early 1968 was inflated by specialfactors, it was evident that the trade position ofthe United States had undergone a sharp deteriora-tion, thus posing a new and substantial problemfor the achievement of equilibrium in the balanceof payments.

Balance of Payments Developments

Although there was little change in the mer-chandise trade balance of the group of industrialcountries from 1966 to 1967, a deterioration intheir balance on services and private transferpayments and a substantial increase in the netoutflow of capital led to a widening of theirover-all deficit from $0.6 billion in 1966 to $3.3billion in 1967 (Table 4).2 The surplus recordedby primary producing countries was $0.7 billion in1967, virtually unchanged from the previous year,and thus over-all deficits exceeded surpluses by$2.5 billion in the combined statement for allreporting countries. The statistical treatment of theliquidation of the United Kingdom's portfolio ofdollar securities accounted for $0.5 billion of thisdiscrepancy, and a further $1.6 billion resultedfrom the decline in world monetary gold holdings.

This reduction of $1.6 billion in gold holdings,stemming from private gold purchases in excess ofsupplies to the market in the form of new produc-tion and sales by the U.S.S.R. less purchases bymainland China, was a major feature of world

2 The external positions of particular industrial coun-tries are discussed below, but it may be noted here thatthe main component of the change in their over-allbalance was the serious worsening in the position of theUnited States.

monetary developments in 1967. In 1966, therewas virtually no change in world monetary goldholdings; in earlier years, there had been a netincrease in these holdings that was reflected in amoderate excess of surpluses over deficits averag-ing some $0.6 billion a year.

Primary Producing Countries

Among the more developed primary producingcountries, over-all positions were not greatlychanged from 1966 with the exception of SouthAfrica, where a $0.2 billion deterioration in thebalance resulted largely from a surge of importsfollowing removal of most import restrictions.Australia's current account balance worsened, butan enlarged inflow of capital served to keep theover-all position close to balance. New Zealand'scurrent account deficit remained at about the samehigh level as in 1966, and the pressure on its re-serve position was again alleviated by borrowingabroad. There was a tendency for the merchandisetrade positions of European primary producingcountries to strengthen, as a result of continuedincreases in the exports of most countries whileimports generally declined. The flow of capital tothese countries declined by slightly more than theimprovement in their current account balance sothat the small deficit in their over-all positionwidened somewhat.

The payments position of the less developedcountries showed a modest improvement from1966 to 1967, but this was concentrated in a fewcountries that benefited from rather special cir-cumstances. Among the primary producing coun-tries of the Western Hemisphere, the most usualpattern was one of a worsening in merchandisetrade balances that was not quite offset by anincrease in receipts of capital. The over-all surplusof the area was concentrated in Argentina, wheregross reserves were increased by the proceeds oflarge foreign borrowings and by a favorable swingin short-term flows, and in Venezuela, where oilsales increased in the wake of the Middle Eastcrisis. In the Middle East, most countries were inover-all surplus in 1967. The surpluses recordedby Jordan and Israel were particularly high. Im-ports fell off sharply in both countries during thethird quarter, and reserves were further strength-ened by emergency capital assistance to Jordanand unusually high private remittances to Israel



TABLE 4. BALANCE OF PAYMENTS SUMMARY, 1966 AND 1967 *(In billions of U.S. dollars)

Current Balance ' Capital Balance Over-All Balance '

1966 1967 1966 1967 19666

Industrial countriesPrimary producing countries

Australia, New Zealand,and South Africa

European countries

Total, more developedcountries

Western HemisphereAfricaMiddle EastAsia

Total, less developedcountries

Excess of deficits ( — )Change in monetary goldTreatment of U.K. portfolio

liquidation 4

Other asymmetries and errors

7.3-6.3

-0.7-1.2

— 1.9-1.2-0.7-0.5-2.0

-4.41.1

7.3-7.8

— 1.1-0.9

-2.0-1.6-0.6-0.3-3.3

-5.9-0.6

-7.97.1

1.01.1

2.11.10.80.72.4

5.0-0.8

-10.58.5

1.10.7

1.82.00.50.73.5

6.8-2.0

-0.5

-0.60.8

0.2-0.1

0.2

-3.30.7

-0.1-0.2

-0.3

0.10.20.4

0.60.2

0.2

0.4-0.1

0.50.2

1.0-2.5-1.6

-0.5-0.4

Sources: Data reported to the International Monetary Fund and staff estimates.1 For balance of payments details, see Supplementary Note B, Tables 37-46.2 Balance on goods, services, and private transfers; government transfer payments are included in capital account.3 In this statistical presentation the over-all balance of payments is generally that financed by changes in net Fund posi-

tions and in official gold and foreign exchange holdings, as shown in International Financial Statistics. In most casesforeign exchange holdings are net of liabilities arising from swap transactions with other central banks and with the Bankfor International Settlements. Advance repayments of foreign debt by governments are also treated as a financing item.For the United Kingdom the over-all balance is that financed by the official monetary movements included in item H ofTable 44 in Supplementary Note B; for the United States it is that financed by "official reserve transactions" as publishedby the U.S. Department of Commerce, and by advance repayments received on foreign debt; for Germany the constituentfigures comprise the "change in over-all central reserve position" as published in the Monthly Report of the Bundesbank,and, in 1966, the advance repayment made on foreign debt.

Discrepancies that become evident when all countries' balances are added together result not only from errors inreporting and the lack of balance of payments data for a number of countries, but also from changes in world monetarygold holdings and from inconsistencies in the treatment of some important transactions, principally in reserve currencies,in the balance of payments statistics of the countries concerned. See, for example, footnote 4, below.

4 Of the excess of deficits over surpluses in 1967 shown in this table, $0.5 billion reflects asymmetrical treatment of theliquidation of the U.K. portfolio of U.S. securities. This transaction gave rise to a capital outflow and an increased over-all deficit in the U.S. accounts, but does not affect the accounts shown for the United Kingdom.

following hostilities. Most of the African countrieswere in weaker payments positions than in 1966as a result of the rapid drop in their exports toindustrial countries that has been noted in theprevious section. There was also a tendency forpayments balances to deteriorate in the Asiancountries, the principal exceptions being Koreaand the Republic of China.

Industrial Countries

In most industrial countries the changes in cur-rent account positions (Table 5) from 1966 to1967 were dominated by the evolution of theirmerchandise trade. Changes in aggregate net flowsof service payments and private transfers wererelatively small and, in most cases, were in linewith the trend of recent years. One significant

exception occurred in North America, where theU.S. travel account deteriorated by some $450million and Canada's improved as much, mainlybecause of travel to Expo 67. Despite the pro-nounced slowdown of trade from 1966 to 1967,the industrial countries' total receipts and pay-ments on transportation account appear to haverecorded much the same increase as in the previ-ous year, reflecting in part the higher oceanfreight rates that prevailed in the second halfof 1967. An interruption in the rising trend ofoutpayments for tourism and workers' remittancesfrom Germany and some other European indus-trial countries had unfavorable repercussions onthe payments positions of Italy and of the southernEuropean primary producing countries.

Japan's over-all payments position was closeto balance in 1967 as in 1966, inasmuch as the

1967


34

ANNUAL REPORT, 1968

TABLE 5. INDUSTRIAL COUNTRIES: BALANCE OF PAYMENTS SUMMARY, 1966 AND 1967 *


Current Balance Capital Balance Over-All Balance

19666

United KingdomUnited States

0.44.1

-0.93.5

-2.0-4.3

-0.4-6.9

-1.6-0.2

— 1.3-3.4

Total

GermanyFranceItalyBelgium-LuxembourgNetherlands

Total, EEC countries

CanadaJapan

AustriaSwitzerlandDenmarkNorwaySweden

All industrial countries

4.5

0.80.12.2

-0.1

3.0

-0.91.4

-0.20.1

-0.2-0.1-0.2

7.3

2.6

3.20.11.90.3

5.4

-0.2

-0.10.2

-0.3-0.2-0.1

7.3

-6.3

-0.30.4

-2.00.10.2

-1.6

0.6— 1.4

0.2-0.1

0.20.20.3

-7.9

-7.3

-3.10.2

-1.3

0.2

-4.1

0.2-0.1

0.3-0.1

0.20.3

-0.1

-10.5

-1.8

0.60.50.3

1.4

-0.3

0.1

0.10.1

-0.6

-4.7

0.10.30.60.20.2

1.3

-0.1

0.20.1

-0.10.2

-0.2

-3.3

Sources: Data reported to the International Monetary Fund and staff estimates.1 The classification of items differs in some cases from that used in national publications and other sources. For defini-

tions of "current," "capital," and "over-all" balances, see notes to Table 4. Detailed balance of payments statements aregiven in Supplementary Note B. For France the figures above relate to transactions with countries outside the Frenchfranc area, for which 1967 details are given in the first column of Table 39.

deterioration in its current account was just aboutoffset by a major reversal of short-term capitalflows. In Europe, Germany's current accountsurplus was nearly matched by a capital outflow of$3.1 billion, much of it in long-term forms, com-pared with an outflow of $0.3 billion in 1966.The over-all surplus declined from $0.6 billion in1966 to $0.1 billion in 1967. Changes in thecapital flows of other continental Europeanindustrial countries were considerably smaller.These changes led to a net outflow of $0.3billion from these countries (compared with anoutflow of $0.6 billion in 1966) and to an im-provement of $0.4 billion in their over-all surplus,offsetting most of the reduction in Germany'ssurplus. That is to say, the increase in continentalEurope's current account surplus was slightly morethan matched by an increase in the outflow ofcapital, and the over-all surplus of the area de-clined moderately to $1.5 billion.

For the United States, an increase in capitaloutflows from $4.3 billion in 1966 to $6.9 billionin 1967, combined with some deterioration oncurrent account, led to the large over-all deficit of$3.4 billion; this was in contrast to the deficit of

$0.2 billion in 1966, when the tightening of creditconditions led to a massive inflow of banking fundsand contributed to a substantial reduction in thenet outflow of capital. The "liquidity" deficit ofthe United States widened by somewhat less, from$1.4 billion in 1966 to $3.6 billion in 1967. Thedeterioration on this basis was held down by anincrease in net foreign official investment in non-liquid U.S. liabilities from $0.8 billion in 1966 to$1.3 billion in 1967 (Supplementary Note B,Table 45). In the United Kingdom, a reversal ofshort-term capital flows in the early part of 1967led to a reduction of the capital outflow from $2.0billion in 1966 to $0.4 billion in 1967—an im-provement that more than offset the deteriorationof $1.3 billion on current account but still left theUnited Kingdom with an over-all deficit of $1.3billion for the year as a whole. Moreover, theUnited Kingdom was in surplus during the earlymonths of 1967 when there were large short-termcapital inflows. Beginning in the spring, however,the trade balance deteriorated and short-termcapital began to leave the country on an increas-ing scale. In the second half of 1967, the over-alldeficit amounted to $2.7 billion, about one half

1967 1966 1966 19671967


WORLD TRADE, PAYMENTS, AND RESERVES

CHART 7. SELECTED COUNTRIES AND AREAS: CURRENT, CAPITAL, AND OVER-ALL BALANCES, 1963-67

(In millions of U.S. dollars)

1 Austria, Canada, Denmark, Japan, Norway, Sweden, and Switzerland.

35



of which arose from short-term capital outflowsdespite official support of sterling in the forwardmarket.

These unsatisfactory developments in the ex-ternal accounts of the two reserve currency coun-tries engendered the major disturbances in thepayments system that came to a head in the latterpart of 1967 and early 1968. The crisis of sterlingand the subsequent emergency measures to pro-tect the dollar were products of a disequilibriumthat had persisted for many years—a disequilib-rium involving continuous balance of paymentsdeficits in the reserve currency countries matchedin the main by surpluses of EEC countries(Chart?).

In the first quarter of 1968 the payments posi-tions of the United Kingdom and the United Statesreflected continuing difficulties. The U.K. currentaccount was in substantial deficit, although at amuch lower level than in the fourth quarter of1967. There were also large outflows of long-termcapital during the first quarter as well as continuedshort-term outflows, with the result that the over-all deficit was running at much the same rate asin the fourth quarter of 1967. The most strikingfeature of U.S. balance of payments developmentsin early 1968 was the deterioration of the tradeaccount, but there was an unusually large im-provement on capital account, which served tobring the over-all deficit in the first quarter downto an annual rate of about $2 billion, from the$3.4 billion recorded for 1967. The impact of theU.S. balance of payments program on capitalflows in the first quarter was evident in a $0.4billion reduction in the claims of banks on non-residents, in a $0.4 billion increase (over theaverage for 1967) in net sales abroad of securitiesby U.S. corporations to finance their foreign opera-tions, and in a decline in the outflow of funds fordirect investment abroad. There was an improve-ment in the short-term capital position in the firstquarter, reflecting in part the difficulties encoun-tered by Canada.

Canada's external position during the first quar-ter was subjected to severe speculative pressures.The current account balance was at about thesame level as in the first quarter of 1967, but areduced inflow of long-term capital and a largeshort-term outflow resulted in a deficit of $0.7 bil-lion financed by losses of reserves and officialshort-term borrowing, compared with a roughly

balanced position in 1967. During the secondquarter there was a large return flow of funds toCanada.

In continental Europe, the principal change incurrent account positions in the first quarter wasthe sharp increase in Italy's surplus. The capitaloutflow from Italy continued on a substantialscale, and there was also a further increase in theoutflow of private long-term funds from Germany.The French balance of payments position appearsto have been strong in the first quarter, but in Mayand June the wave of strikes led to large capitaloutflows and reserve losses.

Long-term capital. Except in the United Statesand Germany there was little change in the long-term capital flows of industrial countries from1966 to 1967 (Table 6). Canada was once againthe main long-term borrower. Japan exportedlong-term capital on about the same scale as in1966 despite the much weaker performance oncurrent account, much of this capital outflow re-flecting deferred payment credits and the increasein economic assistance to developing countries.There were relatively small alterations in the long-term capital accounts of the United Kingdom andof continental European countries other thanGermany.

The long-term capital transactions of the UnitedStates resulted in an outflow of $7.0 billion—$1.1billion larger than in 1966, with official transac-tions accounting for most of the increase. Therewere virtually no advance debt repayments to theUnited States by foreign governments in 1967,whereas the U.S. capital account had benefitedfrom $0.4 billion of advance repayments in 1966.In addition, loans by the Export-Import Bank rosesharply in 1967. The smaller deterioration in theprivate long-term capital position was the net re-sult of a $0.5 billion reduction in direct investmentoutflows (undoubtedly influenced by the voluntarybalance of payments program) and a larger in-crease in the outflow of funds from other privatetransactions, including an increase of some $0.4billion in net U.S. investment in foreign securitiesas well as the sale by the United Kingdom of theremaining $0.5 billion of its portfolio of dollarsecurities. The latter transaction was roughlymatched by foreign purchases of U.S. securities.

The United States has for many years been themain exporter of direct investment funds, althoughthere have been fairly large outflows from theUnited Kingdom and a substantial increase since



TABLE 6. INDUSTRIAL COUNTRIES: BALANCES ON LONG-TERM CAPITAL ACCOUNT, 1965-67


United KingdomUnited States

GermanyFranceItalyBelgium-LuxembourgNetherlands

CanadaJapan

Other industrialcountries

Total

1965

-0.4-4.8

0.60.40.20.1

0.8-0.3

0.4

-3.0

Private

1966

-0.1-2.4

0.40.2

-0.2

0.1

1.0-0.7

0.3

-1.4

1967

-0.1-2.8

-0.50.1

-0.10.1

-0.1

1.3-0.6

0.7

-1.9

1965

-0.7-3.4

-1.3-0.3

-0.2

-0.1-0.2

—

-6.2

Official 1

1966

-0.7-3.4

-1.2-0.2-0.3-0.1-0.1

-0.2-0.3

—

-6.6

1967

-0.6—4.2

-1.1— 0-0.2-0.2-0.1

-0.2-0.4

—

-7.2

1965

-1.2-8.2

-0.80.10.2

0.7-0.5

0.3

-9.3

Total

1966

-0.8-5.9

-0.8-0.1-0.5-0.1

0.8-0.9

0.3

-8.1

1967

-0.6-7.0

-1.70.1

-0.4-0.1-0.2

1.1-1.0

0.6

-9.0

Sources: Data reported to the International Monetary Fund and staff estimates.1 Includes aid and other central government transfer payments.

1965 in the outflow of such funds from Germany.The restraint on the outflow of direct investmentcapital from the United States in recent years hasbeen associated with a major increase in borrowingin Europe for the account of U.S. corporations.Such borrowing amounted to about $650 millionin 1967 (see Table 12) and has been at a muchhigher rate in 1968. In some cases borrowingfrom European financial institutions has beenfacilitated by official credit policies.

The rapid increase in recent years in sales ofinternational securities is described in Chapter 5.Although the funds raised in this way are oftenused in the country where they have been bor-rowed, a substantial part does give rise to netflows of long-term funds between countries. Theflows cannot be traced precisely in the availablestatistics, but some of the pattern can be discerned.For instance, there was a substantial increase inthe volume of bonds issued by Scandinavian bor-rowers from 1966 to 1967, and French borrowersentered the market for the first time with issuestotaling $150 million. It is particularly noteworthythat borrowers in primary producing countriesraised a record total of over $500 million fromEuropean sources in 1967, compared with anaverage of $200 million in the three precedingyears.

The substantial swing in Germany's long-termcapital position from 1966 to 1967 also reflectedinternational bond transactions. The progressive

easing of monetary policy in Germany during1967 brought about a striking decline in the levelof long-term interest rates (see Charts 17 and 18),both absolutely and in comparison with yields onEuro-bonds and other securities. This change inthe relative attractiveness of German bonds in-duced German investors and others to sell suchsecurities and acquire other issues, including Euro-bonds, that offered more attractive returns. At thesame time, Germans were borrowing less in theinternational bond market. Thus, the striking re-versal of Germany's private long-term capitalaccount in 1967 and the continued long-termoutflow in early 1968 were evidence of the work-ing of yield incentives in international long-termcapital movements. There was also a substantialflow of Italian investment funds into the Euro-bond market in 1967 and early 1968, and hereagain the change in relative yield indicated inCharts 17 and 18 was the moving force.3

Private short-term capital flows. Short-termcapital flows shown in Table 7 were, of course,strongly influenced by differences in the levels ofshort-term interest rates among the industrialcountries. In Germany, the marked easing of finan-cial conditions in 1967 reduced domestic moneymarket rates below the comparable rates in otherimportant international money markets (see Chart

* Much of this outflow of funds from Italy appearsto have been reflected in the short-term capital item"Repatriation of Italian banknotes" in the Italian balanceof payments. See Supplementary Note B, Table 41.


TABLE 7. INDUSTRIAL COUNTRIES: PRIVATE SHORT-TERM CAPITAL MOVEMENTS(INCLUDING ERRORS AND OMISSIONS), 1966-FiRST QUARTER 1968


1966

United Kingdomof which

Commercial banksOther identifiedBalancing item

United Statesof which

Commercial banks

Germanyof which

Commercial banks

Japanof which

Commercial banks

Other industrialcountries

of whichCommercial banks *

1966

-1,196

-944-215-37

1,991

3,078

497

-97

-493

—389

— 511

-628

1967

126

\-424

550

99

997

-1,461

-805

943

510

-989

230

Thirdquarter

-624

-641-90107

1,672

1,362

115

-117

-335

-309

-603

-206

Fourthquarter

-316

-110-12

-194

-91

335

188

366

-163

-25

380

10

Firstquarter

1,332

733146453

-662

—654

-449

—819

374

301

-265

354

1967

Secondquarter

199

-160143216

-368

-214

-527

-245

334

185

183

238

Thirdquarter

-827

-433— 178-216

1,502

1,318

-136

-46

39

-63

-804

-554

Fourthquarter

-578

-676

98

-373

547

-349

305

196

87

-102

792

1968

Firstquarter

-451

-29252

-211

700

829

38

-462

354

206

Sources: International Monetary Fund, Balance of Payments Yearbook, and staff estimates; Bank of England, Quar-terly Bulletin; U.S. Department of Commerce, Survey of Current Business.

1 Excludes Switzerland.

15). Moreover, late in the year, when funds weretending to flow to the European continent, theBundesbank encouraged the export of short-termcapital by offering concessional rates for forwardcover. In the fourth quarter of 1967 the Bundes-bank entered into swap transactions with commer-cial banks in the amount of $632 million, underthe stipulation that the swaps were not to be re-versed before the end of the year, that is, notbefore the seasonal peak in the banks' liquidityneeds had been passed (Table 8). For the wholeof 1967 there was an outflow of short-term capitalfrom Germany of $1.5 billion, which together withthe outflow on long-term account almost offset thevery substantial current account surplus. In Japan,on the other hand, the tightening of credit condi-tions led to a rise in domestic interest rates relativeto short-term rates abroad, with the desired resultthat Japanese enterprises switched to foreignfinancing, borrowing almost $1 billion of short-term funds largely from U.S. banks and on theEuro-dollar market; this inflow enabled Japan tomaintain a closely balanced position in its externalaccounts. Over 1967 as a whole the United Statesdid not succeed in attracting a substantial flow ofshort-term funds, whereas in 1966, when U.S.financial conditions became extremely tight, a

short-term inflow of about $2 billion had broughtthe over-all payments position close to balance.Italy, which had been the major exporter of short-term capital in 1966, lent less in 1967 as yieldson domestic money market assets became moreattractive than those on foreign claims. In 1967 theBank of Italy did not enter into swap transactionswith commercial banks on anything like the samescale as in 1966 (Table 8).

The international pattern of short-term capitalflows was strongly influenced in the course of1967 by the ebbs and flows of confidence insterling as well as by interest rate levels. It istherefore appropriate to focus closer attention onthe evolution of the United Kingdom's short-termaccounts (Table 7 and Chart 16).

During the fourth quarter of 1966, the distinctimprovement in the U.K. trade balance led to aresurgence of confidence in sterling, a narrowingof the discount on forward sterling, and a sharpreduction in short-term capital outflows from thehigh level of the third quarter. During the firstquarter of 1967, when monetary conditions easedabroad, particularly in the United States and Ger-many, the United Kingdom experienced an inflowof private short-term capital amounting to $1.3billion. The U.K. external accounts continued to

ANNUAL REPORT, 196838



TABLE 8. GERMANY AND ITALY: CHANGES IN CENTRALBANK SWAP COMMITMENTS WITH COMMERCIAL BANKS,

1965-FiRST QUARTER 1968 *


1965IIIIIIIV

Germany 2

152-80

-144-17

Italy 3

294293585

31

Year -89

1966IIIIIIIV

Year

1,202

20324

125— 4

348

1967IIIIIIrvYear

1968I

632

632

226

3141213

42

8

Sources: Deutsche Bundesbank, Monthly Report, May1968; Bank of Italy, Annual Reports, 1965-67.

1 No sign indicates increase; minus sign indicatesdecrease.

2 U.S. dollar swap commitments of Deutsche Bundes-bank to German credit institutions.

3 Includes swaps with and without guaranteed rates andforeign exchange deposits with the Italian ExchangeOffice.

benefit from an inflow of short-term funds intothe second quarter of 1967. By April the UnitedKingdom had repaid all short-term debt to othercentral banks, and in late May it repurchasedalmost one half of the 1964 drawing from theFund, six months ahead of schedule.

Beginning during the second quarter of 1967,there was a growing realization that the expectedimprovement in the U.K. external trading positionwas not materializing. This was the underlyingfactor that weakened confidence in sterling andled to a reversal in the course of the secondquarter in the direction of short-term capitalflows. In the following months the continued de-terioration in the trade balance, coupled withthe lingering uncertainties engendered by theMiddle East crisis, further eroded confidence insterling. Another factor contributing to the pres-sure was the rising level of short-term rates in the

United States. The main counterpart of the UnitedKingdom's substantial outflow seems to have beenan inflow to the United States, where there was avery large increase during the third quarter incommercial banks' liabilities to their foreignbranches and to other nonresidents.

The U.K. trade deficit widened ominously inSeptember and October, and expectations con-cerning exports sagged with the continuation ofthe dock strike. In these circumstances, increasesin Bank Rate taken in concert with action by othercentral banks to hold down rates in the Euro-deposit market could do little to restore confidencein sterling.

The 14.3 per cent devaluation of the poundsterling on November 18 left in its wake continueduncertainties about the stability of currencies gen-erally and of the U.S. dollar and the pound sterlingin particular. Although there was some returnflow of funds to the United Kingdom, it was notas large as the outflows prior to devaluation andfor the fourth quarter as a whole there was a$0.6 billion outflow of short-term funds. Theserious weakening of confidence was also mani-fest in other substantial short-term flows as specu-lators moved funds from U.S. dollar assets into themajor continental currencies and into gold.

Changes in International Reserves

The major forces underlying changes in inter-national reserves in recent years have been thedeficits in the payments balances of the UnitedKingdom and the United States. The strains towhich these deficits gave rise became much morepronounced in 1967 and, in the effort to meetthem, there was greater recourse to techniqueswhich themselves affect the size and compositionof world reserves. The transactions employed—principally swaps between central banks—addedto countries' holdings of foreign exchange. Theseincreased by $3.7 billion in 1967, despite the re-duction of about $0.6 billion in the dollar value ofsterling reserves which resulted from the devalua-tion. However, the total of countries' reserves in-creased in 1967 only slightly more than in 1966because of a very large movement of gold fromofficial to private holders and a reduction of re-serve positions in the Fund (Table 9). Duringthe first quarter of 1968, the drain on official gold


40

ANNUAL REPORT, 1968

holdings continued and the total of countries'reserves declined by $1.0 billion.

The reserves data considered here exclude facili-ties in the form of conditional credit available inthe Fund and of unactivated central bank swaps.4

With regard to the latter, it may be noted that theunused portion of swap lines rose during 1967—despite increased recourse to them—and again inMarch 1968, when the lines were further in-creased.

amounted to $0.7 billion, and especially in 1965,when such sales totaled $1.3 billion.

The largest increase in foreign currency reservesrecorded for an individual country other than theUnited States was that of $609 million for Italy,almost entirely in U.S. dollars. In 1966 Italy'sofficial foreign exchange holdings had declined by$235 million, but the Bank of Italy had encour-aged an outflow of funds by selling a net amountof $348 million of foreign exchange to commercial

TABLE 9. SUMMARY OF CHANGES IN COUNTRIES' OFFICIAL RESERVES, 1965-FiRST QUARTER 1968(In billions of U.S. dollars)

Foreign exchangeU.S. liabilitiesU.K. liabilitiesOther

Reserve positions in IMF

Countries' holdings of goldSupply 1

Less private purchasesTransactions with IMF, BIS,

and the European Fund

Total

1965

-0.50.1

-0.3-0.3

1.2

1.01.8

-1.6

0.8

1.7

1966

1.4-0.9

0.81.5

1.0

-1.01.4

-1.4

-0.9

1.4

1967

3.73.3

0.4

-0.6

-1.41.4

-3.0

0.2

1.7

1967

First

-0.70.2

-1.20.3

-0.1

-0.50.4

-0.4

-0.4

-1.2

1968

quarter

0.8-1.1

1.10.8

—

-1.70.4

-1.8

-0.3

-1.0

Sources: International Monetary Fund, International Financial Statistics, and staff estimates.1 New production plus sales by the U.S.S.R. ($550 million in 1965, $15 million in 1967, and $11 million in the first

quarter of 1968) less purchases by mainland China ($150 million in 1965, $75 million in 1966, and $20 million in 1967).

Reserve Components and Policies

Details of changes in the components of re-serves of most industrial countries and of otherregions of the world in 1966 and 1967 are givenin Table 10. The increase of $3.7 billion in hold-ings of foreign exchange during 1967 largely re-flected transactions undertaken by industrial coun-tries as part of the effort to cope with the pressuresthat developed on the reserve currencies. Thus,most of the gain of more than $1.0 billion in U.S.foreign exchange holdings stemmed from swaptransactions with the Bank of England undertakento provide funds required for the defense of thepound. Also, the increase of nearly $2 billion inthe foreign exchange component of the reservesof continental "Industrial Europe" was influencedby the policies of countries prepared to hold U.S.dollar assets, rather than to present dollars to theUnited States for conversion into gold—as hap-pened in 1966, when net U.S. gold sales to Europe

4 For comment on these "supplements" to worldreserves, see Annual Report, 1967, page 11.

banks under advantageous swap contracts. In1967 the net increase in such swap commitmentswas only $42 million (Table 8). In order tocounter a heavy flow of dollars to the Bank ofItaly in the third quarter of 1967, the FederalReserve System drew $0.5 billion in lire on itsswap line with that Bank and used the lire to repur-chase dollars. Similar drawings, although on amuch smaller scale, were undertaken with thecentral banks of Belgium, the Netherlands, andSwitzerland. All these transactions had the effectof providing an exchange guarantee on the Euro-pean countries' holdings of the amounts of dollarsinvolved in the swaps. The bulk of the addition toGermany's foreign exchange holdings was also inthe form of U.S. dollars. However, under the U.S.-German agreements of May 1967 on the equaliza-tion of the foreign exchange cost of U.S. troops inGermany, the United States substituted $250 mil-lion in the form of 4% -year DM-denominatedtreasury notes for liquid dollars; further Germanpurchases of two notes of $125 million each were



TABLE 10. COUNTRIES' OFFICIAL RESERVES, 1966 AND 1967 l


Net Changes in Reserves -

Gold

Industrial CountriesUnited StatesUnited Kingdom

Total, reserve centers

FranceGermany 3

Italy 4

Belgium-Luxembourg and NetherlandsSwitzerlandOther Industrial Europe r>

Total, Industrial Europe

CanadaJapan

1966

-830-325

-1,155

532-118

10-59

-2011

165

-1051

1967

-1,170— 649

— 1,819

— 4— 64-14-64248-2

100

-319

Foreignexchange

1966

540420

960

— 246537

-235-6281

60

390

-324-100

1967

1,024245

1,269

367393609575

— 1763

1,990

61— 15

Reservepositionin IMF

1966

-278

-278

104181336113

79

811

9368

1967

94

94

— 102-205-43

-100

-9

-459

-15-82

Total

1966

-56996

-473

3906001104880

140

1,365

— 334— 33

1967

-51-405

-456

261124553411231

55

1,635

16-89

Gold

12,0651,291

13,356

5,2344,2282,4003,1973,0891,029

19,175

1,015338

Totals, End of 1967

Foreignexchange

2,3451,404

3,749

8742,8722,2211,338

4662,139

9,910

1,2601,454

Reservepositionin IMF

420

420

8861,052

842683

368

3,830

433239

Total

14,8302,695

17,525

6,9948,1525,4635,2183,5553,537

32,915

2,7092,030

Total, industrial countries

Other Developed CountriesOther European countries °Australia, New Zealand, South Africa

-1,095 —1,740 925 3,305 694 -462 525 1,105 33,885 16,375 4,922 55,185

85 47 -134 6 46 -186 -1 -132 1,906 1,562 59 3,529205 -47 14 —150 47 45 266 —153 814 1,263 265 2,341

Total, other developed countries

Less Developed CountriesWestern HemisphereAfricaMiddle EastOther Asia

Total, less developed countries

Grand Total

290

-70—— 55

-25

-150

-950 -

—

151609560

340

1,400

-120

-135120190430

605

1,410

— 145

245— 120

33090

540

3,700

93

77133244

167

954

— 141

3683

— 19

20

-582

265

-130135170450

625

1,415

— 285

29648

422131

900

1,715

2,720

1,000295820710

2,895

39,505

2,825

2,2051,3602,3503,185

9,095

28,295

324

229959682

501

5,748

5,870

3,4351,7503,2653,975

12,490

73,545

Source: International Monetary Fund, International Financial Statistics.1 Excluding CMEA countries, mainland China, etc. Totals may not add because of rounding and because some area totals include

unpublished data.2 Positive figures are credits; negative figures are debits.3 Includes the Bundesbank's investment in U.S. Treasury paper ($250 million in 1967) acquired in accordance with the U.S.-German agree-

ments of May 1967.4 Includes swap claims and nonmarketable U.S. Government securities.G Austria, Denmark, Norway, and Sweden.0 Finland, Greece, Iceland, Ireland, Portugal, Spain, Turkey, and Yugoslavia. Also includes unpublished gold reserves of Greece and an

estimate of gold to be distributed by the Tripartite Commission for the Restitution of Monetary Gold.

made in the first and second quarters of 1968. In1967 the Bundesbank sold a net amount of $632million to commercial banks at concessional swaprates, and a further $226 million was sold in thefirst quarter of 1968. For France, the $367 millionincrease in foreign currency holdings during 1967was mainly the reflection of a speculative inflowof dollars in November estimated at $330 million.The French authorities held the dollars althoughthis meant a deviation from the earlier customaryratio of foreign exchange to gold in French re-serves. U.K. holdings of U.S. dollars increasetoward the end of the year, when dollars wereacquired in exchange for gold in the London mar-ket and the United Kingdom liquidated the re-maining $490 million of its dollar portfolio.

Full details of the swap transactions with theBank of England are not available, but it is knownthat U.S. holdings of sterling, which had declined

from $0.9 billion at the end of 1966 to $0.2 bil-lion in March 1967 as a result of repayments bythe Bank of England of indebtedness incurredduring the 1966 sterling crisis, rose again to $0.5billion at the end of June and to $1.1 billion bySeptember, and reached $1.8 billion at the timeof the devaluation of sterling. However, the dollarvalue of sterling held as official reserves—otherthan that acquired through official support ofthe pound—was reduced by some $0.6 billion bythe devaluation, and for 1967 as a whole therewas virtually no change in this component ofworld reserves.

The $0.6 billion decline during 1967 in members' reserve positions in the Fund—which con-trasts with an increase of $1.0 billion in 1966,largely caused by gold subscriptions to the Fund—mainly reflected the repurchases totaling $655million made by the United Kingdom in May andNovember.



The gold subscriptions to the Fund were themajor factor in the 1966 decline of countries' goldholdings. Even in the absence of gold sales by theU.S.S.R., the supply of newly available goldroughly matched the private demand for industrialand hoarding purposes.

In 1967 and early 1968, however, the privatedemand for gold dramatically outstripped newsupply for the first time in the postwar period.Gold production was of about the same magnitudeas in 1966, but private demand for gold increasedfrom $1.4 billion to $3.0 billion. As purchases ofgold for industrial use may be assumed to haverisen rather moderately, most of the increase inthe drain on official reserves is attributable topurchases by private hoarders and speculators.Such purchases were heavily concentrated in thefinal quarter of the year, notably in the week fol-lowing the devaluation of sterling in Novemberand in the second week of December.

Most of the private demand in the last twomonths of 1967 and up to March 15, 1968 wasmet by the seven actively participating membersof the gold pool who continued to make goldavailable at prices close to $35 an ounce. Theirlosses are estimated at about $1% billion in 1967,and about the same amount in 1968. Of the totalloss in 1967, roughly $0.8 billion was borne bythe United States and the remainder by the Euro-pean members of the pool. As a rule, the gold poolmembers settled a particular month's transactionswith the Bank of England in the following month.However, the United States chose to make a trans-fer in December to cover its share of the lossessustained in both November and December, sothat the $1,170 million decline shown for thatcountry for 1967 includes in full its contributionto the year's operations. Details on other transac-tions affecting U.S. gold holdings in 1967 aregiven in Chapter 7.

The decline in U.K. gold holdings, shown as$649 million for 1967, overstates that country'sloss (perhaps by some $0.2-0.3 billion) as itincludes the share of other European members ofthe gold pool in the pool's losses in December,which remained to be settled in January 1968.The gold losses incurred by Germany, Belgium,and the Netherlands largely stemmed from salesundertaken through the gold pool. The effects in

1967 of similar sales on the gold holdings of Italyand Switzerland were reduced by purchases of$85 million and $30 million, respectively, fromthe United States.

The increase in Switzerland's gold holdingsduring 1967 reflected mainly temporary swaptransactions. There were also increases in the goldholdings of a number of less developed countries.The net acquisition of gold by all less developedcountries amounted to $340 million in 1967, andthere have been further increases in 1968.

Official Transactions and the Euro-Dollar Market

Swap transactions were the principal techniqueemployed during the summer and fall of 1967 inthe effort to preserve the parity of sterling. Large-scale operations by the monetary authorities inindustrial countries, together with the Bank forInternational Settlements (BIS), were required atthe time of the Middle East crisis to counter specu-lative flows of funds stemming from heavy salesof sterling that coincided with precautionary shiftsof funds from the Euro-dollar market to conti-nental centers, notably to Switzerland. To this wasadded the seasonal increase in the liquidity needsof commercial banks, a factor which in severalcountries causes transfers of foreign assets to themonetary authorities at the middle and end ofeach year. Concerted action, largely based on theactivation of swap lines, proved effective in neu-tralizing the influx of funds into official reservesand in relieving shortages in the Euro-dollarmarket. As on earlier occasions, the BIS supportedthe central banks' operations and drew dollars onits swap lines with the Federal Reserve System inorder to place them in the market. The FederalReserve System also cooperated with Europeancentral banks by offering forward cover throughswap drawings of dollars. For Germany suchdrawings in the amount of $300 million were madein connection with the swap transactions betweenthe Bundesbank and German commercial banks.Taken together, these central bank operationsamounted to some $1.4 billion during late 1967and went far toward calming the Euro-dollarmarket.


Chapter 5

Developments in the Industrial Countries

THE economic slowdown that had emerged inmany industrial countries1 in the latter part

of 1966 became more pronounced during the firsthalf of 1967, but there was a widespread recoveryduring the second half. These movements weredominated by developments in the United Statesand Germany. Upward pressures on prices andwages in most of the industrial countries tended toease during 1967, especially in Europe; in theUnited States, such easing as occurred was shortlived.

In contrast to previous years, the directionof fiscal policy in 1967 was distinctly anticyclicalin most industrial countries, being basically expan-sionary throughout the year in some countries andswitching from expansionary to contractionary inthe latter part of the year in others. In most coun-tries, the emphasis of expansionary policies was onincreases in expenditure rather than on taxchanges. Monetary policies also followed an anti-cyclical pattern. Discount rates were generallyreduced during the first eight months. In the cir-cumstances leading up to and following the 14.3per cent devaluation of sterling in November1967, there were sharp increases in discount ratesin a number of countries, but an important fea-ture of this period was the deliberate effort on thepart of some major industrial countries to abstainfrom increasing discount rates or adopting otherpolicies of restraint. Although 14 other countriesdevalued at the same time as the United Kingdomor shortly thereafter, this group did not includeany of the industrial countries except Denmark.

After the devaluation of sterling the gold mar-ket came under intense speculative pressure. As aresult, there was a substantial drain of gold fromthe reserves of the United States and the other sixindustrial countries actively participating in theLondon gold pool. The heavy deficit in the U.S.balance of payments during 1967, particularlyduring the fourth quarter, was associated withspeculative pressures; these abated only briefly

1 See footnote 1, page 27.

after the announcement by the United States of anew and comprehensive program of balance ofpayments measures on January 1, 1968. OnMarch 17 the Governors of the seven central banksactively contributing to the gold pool announceddecisions resulting in the creation of a two-pricesystem for gold (see Chapter 7). On March 19,the United Kingdom adopted a stringent budgetthat reflected its determination to deal with itsbalance of payments problem. In the United States,the Administration encountered legislative delay inthe adoption of a program of fiscal restraint, theneed for which was highlighted by first-quarterdevelopments; these included growth at a ratemuch greater than the estimated capacity rate,strong price pressures, and a sharply reduced levelof the surplus on merchandise trade. A fiscal pro-gram including both increases in income taxes andreductions in federal expenditures was finallyenacted late in June.

In France, the wave of strikes that erupted inMay 1968, and the wage settlements reached inthat connection, affected confidence in the francand led to substantial outflows of funds and alarge decline in reserves during May and June.The measures taken to deal with these develop-ments, and with the threat of inflation, includedan increase in the discount rate, the reintroductionof exchange controls, the imposition of restrictionson capital outflows, and measures to promoteexports and curb imports, as well as proposals fortax increases.

Output and Demand

The tendency toward a slowing in the growth ofoutput and demand that had developed in mostof the industrial countries during the second halfof 1966 continued and intensified during the firsthalf of 1967. Particularly noteworthy were thedeclines in industrial production that occurred inthe United States and Germany, together with

43



continued sluggishness in the United Kingdom(Charts 8 and 9).

From the second half of 1966 to the first half of1967, seasonally adjusted real gross national prod-uct (GNP) increased at an annual rate of onlyabout 1 y2 per cent in the United States and actu-ally declined at a rate of about 3 per cent inGermany. These movements were influenced bysizable adjustments in business investment, pri-marily in inventories; such adjustments, alongwith a dampening of export growth, also occurredin some of the other industrial countries. Belgium-Luxembourg, Canada, France, the Netherlands,and Switzerland all sustained reductions in therate of growth of total output during the periodfrom late 1966 to early 1967.

The 1966-67 slowdown in many of the indus-trial economies—which in Europe was the most

CHART 8. SELECTED AREAS AND COUNTRIES: INDUSTRIALPRODUCTION, SEASONALLY ADJUSTED,

1964-FiRST QUARTER 1968

(1958 = 100)

widespread and pronounced since the recessionof 1957-58—stemmed in large degree from officialactions. The object of these actions had been tocurb price inflation and, in some countries, tocorrect balance of payments deficits.

During the second half of 1967, there was awidespread recovery in the rate of growth ofeconomic activity. In the United States, seasonallyadjusted real GNP advanced at an annual rate of4 per cent with a moderate rise in business fixedinvestment, a sharp increase in business inventoryaccumulation, and a further expansion of house-building, which had already recovered somewhatin the first half of the year from the severely de-pressed conditions of late 1966. In Germany, realGNP increased at an annual rate of approximately5 per cent over the first half of 1967. In Belgium,Canada, France, and the Netherlands, similar re-covery took place during the second half of 1967,although it started at different times and proceededat different rates. Thus in France, although indus-trial production had been edging upward sinceJuly, the general slowdown probably persisteduntil late in 1967.

The main exceptions to this pattern of develop-ments in 1967 were Italy and Japan. In both coun-tries, there was a rapid expansion in output anddemand during the year in continuation of the

CHART 9. EEC COUNTRIES: INDUSTRIAL PRODUCTION,SEASONALLY ADJUSTED, 1964-FmsT QUARTER 1968

(1958 - 100)


DEVELOPMENTS IN THE INDUSTRIAL COUNTRIES 45

upswing which in Italy had begun in early 1966and in Japan in late 1965. In Italy no seriousproblems appeared; but Japan faced increasingbalance of payments difficulties and shifted froman expansionary to a contractionary fiscal andmonetary policy over the year.

The course of output and demand in the UnitedKingdom was also rather different from that inother industrial countries. There was a slight re-covery in the first quarter of 1967 that did notcontinue into the second. In the third quarter,consumer expenditures rose mainly under thestimulus of the relaxation of hire-purchase con-trols. During the fourth quarter consumer expen-ditures again rose substantially, partly in anticipa-tion of restraints on consumer demand beingimposed under the stabilization program followingsterling devaluation and partly in anticipation ofprice increases reflecting the higher sterling valuesof imports.

Employment, Wages, and Prices

In most of the industrial countries of Europe,unemployment increased substantially in 1967, andthe rate of increase of prices was much smallerthan in the previous year. In Germany seasonallyadjusted unemployment rose from a low of about0.5 per cent of the industrial labor force in thefirst quarter of 1966 to a high of about 2.3 percent in the second and third quarters of 1967. Inthe Netherlands, seasonally adjusted unemploy-ment rose from about 1.0 per cent to about 2.5 percent of the total labor force over the same period.In France and Belgium the number of unem-ployed had been edging up in 1966 and continuedto rise through much of 1967. The ease of de-mand for labor was reflected in the index of hourlyearnings, which in most of these countries rose lessin 1967 than in 1966 (Chart 10). In Italy, wherethe pace of economic activity remained strong,unemployment was reduced during the year andwages advanced at a faster rate than in 1966.

In the United States the unemployment rateremained at the reduced level of 3.8 per cent—the same as in 1966—although several other indi-cators (such as the insured unemployment rate,average hours worked per week in manufacturing,and the "help wanted" index) suggested that labormarkets were somewhat less tight during 1967.

CHART 10. SELECTED AREAS AND COUNTRIES: WAGERATES, 1964-FmsT QUARTER 1968

(1958 = 100)

In Canada unemployment rose and labor marketpressure seemed on balance less than in 1966.The behavior of wages in both countries reflectedmainly adjustments to the high demand condi-tions that had existed in 1965 and 1966.

In the United Kingdom unemployment rosethroughout most of 1967, reaching its highestpoint in the postwar period, although it was onlyslightly higher than that recorded in 1963. Signifi-cant increases in wages did not occur until afterJune 1967, when the six-month period of "severerestraint" that followed the earlier six-monthperiod of "prices and incomes standstill" came toan end.

In the United States hourly earnings in manu-facturing again increased faster than output permanhour, and wage costs per unit of output(Chart 11) rose more from 1966 to 1967 thanfrom 1965 to 1966. In Canada unit wage costsincreased slightly more than in 1966. However,in Germany and the United Kingdom, unit wagecosts in manufacturing increased by less than 1per cent in the first nine months of 1967, com-pared with about 5 per cent in the same period of1966. In Japan, with a sharp rise in productivityand with earnings increasing at about the samerate as in 1966, wage costs in manufacturing de-clined in the first nine months of 1967.



CHART11. SELECTED COUNTRIES: WAGE COST PERUNIT OF OUTPUT IN MANUFACTURING,

1964-FiRsr QUARTER 1968

(1958 = 100)

In the United States the increase in the GNPdeflator was slightly higher for 1967 as a wholethan the 2.7 per cent increase recorded in 1966.However, following some moderation in the firsthalf of the year, price increases accelerated in thesecond half.2 Consumer prices increased at aslightly lower rate from 1966 to 1967 than in theprevious year, with prices of services continuing torise more than those of commodities. In Canadaboth the GNP deflator and the consumer price

CHART 12. SELECTED AREAS AND COUNTRIES: COST OFLIVING, 1964-FiRST QUARTER 1968

(1958 - 100)

index rose somewhat less than in 1966, primarilybecause of a sharp decline in the rate of increasein food prices, but upward pressures on pricesremained intense. In Germany, the Netherlands,

2 In the second half of 1967 and the first quarter of1968, the increase in the GNP deflator approached thehigh annual rate of 4 per cent.

and the United Kingdom increases in consumerprices in 1967 were much less than in 1966(Chart 12). Consumer prices also rose less inBelgium, Sweden, Switzerland, and Japan. InFrance these prices increased at about the samerate as in 1966. In Italy consumer prices increasedat a faster rate. Wholesale prices in the industrialcountries (Chart 13) generally increased less in1967 than in 1966, in part because of the down-ward movement in the prices of imported com-modities. There were, in fact, slight declines inthe wholesale price indices of Belgium, France,and Germany.

CHART 13. SELECTED AREAS AND COUNTRIES: WHOLESALEPRICES, 1964-FiRST QUARTER 1968

(1958 = 100)

Fiscal Policy

In the circumstances prevailing during 1967,fiscal policy operated in an anticyclical manner inmost industrial countries. In some countries it wasexpansionary through the year, while in others itwas expansionary in the first half and contraction-ary in the second.

In Belgium, France, Germany, the Netherlands,and Sweden, fiscal policy was expansionary forthe entire year, with deliberate programs beingadopted in each country to promote an expansionof demand. In Germany two anticyclical programswere introduced during the year. The first, adoptedin January 1967, called for an increase in depre-ciation allowances and the adoption of a specialcontingent investment budget of DM 2.5 billion.The second, adopted in the third quarter of 1967,called for additional government expendituresamounting to DM 5.3 billion and the provision ofadditional relief to holders of existing stocks fromthe turnover tax burden at the time of the transi-



tion to the value-added tax system at the beginningof 1968. In France also, the budget was revisedtwice during 1967. While the original budget for1967 was in balance, the first revision provided forborrowing of F 4.2 billion and the second foradditional borrowing of F 3.0 billion. These re-flected revenue shortfalls that were accepted fortheir automatically stabilizing effects. In January1968 additional measures aimed at stimulatingeconomic activity were adopted. These includeda cut of about 5 per cent in the personal incometax on the 1967 incomes of taxpayers with lessthan F 50,000 of taxable income. Taxpayers werepermitted to deduct the whole of the reduction inthe tax from the installment due in February 1968.Provision was also made for increases in familyallowances and pensions, and for additional con-struction of low-income housing. Following thewave of strikes in May and June 1968, it wasrecognized that the budgetary position would beadversely affected by increases in expenditures aswell as by shortfalls in revenue. The French au-thorities have proposed tax increases to deal withthis situation.

In the Netherlands, measures adopted to stimu-late demand included supplementary governmentexpenditures to relieve regional unemployment;for this purpose f. 600 million was made availableduring 1967 and 1968, of which f. 120 millionwas spent in 1967. In addition, revenue shortfallswere permitted to contribute to the desired stabi-lizing effects. In Belgium the Government obtainednew powers in April to stimulate investment andindustrial restructuring and to speed up regionaldevelopment programs. It invoked these powers onseveral occasions during the year. In Sweden theauthorities released for use by enterprises rela-tively large amounts of so-called investment fundsfor the financing of investment.

In the United Kingdom the direction of fiscalpolicy was changed during 1967. As the expectedrecovery of economic growth did not take place,fiscal measures of a marginal nature were adoptedtoward the middle of the year to stimulate eco-nomic activity. However, at the time of sterlingdevaluation certain measures of fiscal restraintwere announced, although most of these were tobecome effective in 1968. These measures includedan increase in the corporation tax, the terminationof the export rebates, the withdrawal (except inthe Development Areas) of the premiums paid to

manufacturers under the Selective EmploymentPayments Act, and reductions in both defenseexpenditure and other public expenditure, includ-ing investment by nationalized industries. OnJanuary 16, 1968, an increase in the NationalHealth Service contribution and a series of addi-tional cuts in public expenditure, mainly on educa-tion, health and welfare, and housing and roads,were announced for 1968/69 and 1969/70. Laterit was indicated that the rate of growth of publicexpenditure, which had been 13 per cent for publicinvestment and 4 per cent for public consumption,would be cut • to 2 per cent a year until themiddle of 1969.

On March 19, 1968, the British Chancellor ofthe Exchequer presented the 1968/69 budgetestimates, which reflected the previously an-nounced plans for cuts in the rate of growth ofpublic expenditure. A severe check was also im-posed on private consumption. Consumer expen-diture in real terms, which on a prebudget basiswas expected to increase from mid-1967 to mid-1969 by about 1 per cent a year, was cut back2 per cent per annum. A substantial part of theprojected cut in consumption was to be effectedthrough indirect taxation, including higher dutieson betting and gaming; higher duties on alcoholicbeverages, tobacco, and hydrocarbon oils; in-creased purchase taxes (up to 50 per cent forluxury goods); and higher rates for the selectiveemployment tax. The total yield from all the in-creases in taxation was estimated at £775 millionfor the remainder of 1968/69 and at £923 milion for a full year. The borrowing requirement ofthe Government during the fiscal year was put at£,360 million, compared with £1,331 million inthe fiscal year 1967/68. The Government alsodecided on a strengthening of the policy for prices,incomes, and dividends, backed by extended statu-tory powers. On the incomes side, its main featurewould be a ceiling of 3 % per cent on increases inall the main forms of remuneration, excludingincreases directly related to productivity.

In Canada also, the aim of fiscal policy wasreversed during the year. Early in the year, taxmeasures that had been enacted in 1965 and in1966 to restrain demand, especially investment,were abolished. In June the Government intro-duced measures that were expected to have amodest expansionary effect. However, by the be-ginning of the fourth quarter conditions had



changed, so that new fiscal measures of an anti-inflationary nature were proposed on Novem-ber 30 in a supplementary budget. These includeddownward adjustment of spending programs forthe 1967/68 and 1968/69 fiscal years and re-strictions on lending programs in order to reducethe Government's demands on the capital market.Tax measures proposed and approved included a10 per cent rise in excise taxes on alcohol andcigarettes, and the acceleration of corporate taxpayments. The proposal for a 5 per cent sur-charge on personal income tax was, however,rejected by the Canadian Parliament in February1968. Subsequently, new proposals calling for a3 per cent surcharge on both personal and corpo-rate income taxes were made and approved.

In the United States there was a special inflowof tax revenues during the first half of 1967 as aresult of the schedule of accelerated tax paymentsadopted in earlier years. However, as the pace ofeconomic activity was slow, some budgetary fundsthat were frozen for cyclical reasons in the autumnof 1966 were released. Also, during March therewas an early restoration of the 7 per cent taxcredit for investments in equipment and the ac-celerated depreciation on industrial and commer-cial building, which had been suspended for aperiod originally scheduled to run from October1966 to the end of 1967.

Even at the beginning of the year, however, theU.S. authorities had anticipated a more rapidexpansion of economic activity in the second halfof 1967. Therefore, in presenting the 1967/68budget estimates in January 1967, the Governmentdeclared its intention to propose some tax meas-ures to take effect at mid-year; these included a6 per cent surcharge on the income tax liabilitiesof individuals and corporations. In early Augustthe Government proposed a surcharge at the rateof 10 per cent, as well as the postponement of thereductions in excise duties on automobiles andtelephone services scheduled for April 1, 1968.These proposals remained under consideration formany months and were finally enacted on June 28,1968 as part of a fiscal package that also includeda $6 billion cut in federal expenditures.

In Japan during 1967, fiscal policies movedsteadily away from the expansionary approach ofthe preceding year. In January and March 1967,the Government reduced its scheduled bond issues.The budget for fiscal 1967 was formulated at this

time so as to have a more or less neutral effect onthe economy, in contrast to the clearly expansion-ary effect planned for the budget for fiscal 1966.In September 1967 the Government decided tomake the budgetary effect on the economy defi-nitely contractionary by deferring 7 per cent ofbudgeted investment outlay.

Monetary Policy

During 1966, monetary policy in most of theindustrial countries had been strongly directed to-ward the restraining of demand. Central bank dis-count rates, as well as other interest rates in moneyand capital markets, had risen quite sharply untilthe third quarter. Although market rates tendedto drift downward from peak levels thereafter,they were still extremely high at the end of 1966.

The continuing economic slowdowns in the firsthalf of 1967 led to successive declines in discountrates. All discount rate changes in the first eightmonths of the year were declines (Table 11 andChart 14). During this period there were foursuch changes in Germany, three in Belgium and

CHART 14. DISCOUNT RATES, 1964-JuLY 19, 1968

(In per cent per annum)



TABLE 11. SELECTED COUNTRIES: CHANGES IN DISCOUNTRATES, JANUARY 1967-JuLY 19, 1968

Date

Increase orDecrease a

(PercentagePoints)

New Rate(Per Cent

Per Annum)

January to December 1967

GermanyUnited KingdomCanadaBelgiumSwedenGermanySwedenNetherlandsUnited KingdomBelgiumUnited StatesCanadaGermanyAustriaUnited KingdomBelgiumGermanySwitzerlandJapanBelgiumCanadaUnited KingdomBelgiumAustriaUnited KingdomUnited KingdomUnited StatesCanadaSwedenDenmark

JapanCanadaSwedenBelgiumUnited StatesCanadaDenmarkUnited KingdomUnited StatesDenmarkCanadaFrance

January 6January 26January 30February 2February 3February 17March 10March 15March 16March 23April 7April 7April 14April 18May 4May 11May 12July 10September 1September 14September 27October 19October 26October 27November 9November 18November 20November 20December 15December 19

January to July

January 6January 22February 9March 7March 15March 15March 19March 21April 19June 13July 2July 3

— 0.50150150-0.25

-0.50-0.50-0.50-0.50-0.50

-0.25—0.5

-0.5 0— 0.50-0.25

-0.50— 0.25-0.50-0.50

0.36-0.25

0.500.50

— 0.25-0.50

0.501.500.501.001.001.00

1968

0.361.00

-0.50-0.25

0.500.50

— 0.50-0.50

0.50-0.50— 0.50

1.50

4.506.505.005.005.504.005.004.506.004.754.004.503.504.255.504.503.003.005.844.255.006.004.003.756.508.004.506.006.007.50

6.217.005.503.755.007.507.007.505.506.507.005.00

Source: International Monetary Fund, International FinancialStatistics.

1 No sign indicates increase; minus sign indicates decrease.

the United Kingdom, two in Canada and Sweden,and one in Austria, the Netherlands, Switzerland,and the United States.

In addition to changes in discount rates, mone-tary and credit restraints were reduced in otherways. Thus, in the United States the Fed-eral Reserve Board lowered reserve requirementsagainst savings deposits and against the first$5 million of time deposits in individual memberbanks. In Germany the differential treatment ofthe foreign positions of banks for reserve require-ments purposes was abolished early in 1967 andthe minimum reserve requirements were them-selves reduced in seven steps between December1966 and September 1967. In the Netherlandsthe penalty on credit expansion over the pre-

scribed ceilings was lowered in January and sus-pended in March 1967; quantitative restrictionson commercial bank loans to the private sectorwere removed in June. In Switzerland quantitativerestrictions on expansion were lifted in September.In France terms for consumer credit were eased.The general easiness of credit during this periodwas reflected in some of these countries in substan-tial increases in bank liquidity that the centralbank supported through appropriate measures,including open market operations or increasesin resources provided directly to the bankingsystem.

During the last few months of 1967 there wasa sharp change in the direction of monetary policyin many industrial countries, primarily becauseof external considerations. In these countries dis-count rates were raised so that by the end of 1967they were at, or higher than, their levels at theend of 1966. Toward the end of September 1967,in response to a rise in money market rates insympathy with sharply rising interest rates in NewYork, the Bank of Canada increased the discountrate from 4% per cent to 5 per cent. Most of theother changes in discount rates that occurredduring this period were associated with the eventsleading up to and following the devaluation ofsterling.

By May 1967 the covered differential betweeninterest rates in international money markets andthose in London had moved against the UnitedKingdom. As this differential continued to widen,and sterling came under pressure in exchangemarkets, the Bank of England raised its discountrate from 5y2 per cent to 6 per cent on Octo-ber 19 and to 61/{> per cent on November 9.When sterling was devalued on November 18,1967, the British discount rate was simultaneouslyraised to 8 per cent—the highest level since 1914.Other measures taken by the U.K. authorities atthis time included the reimposition of ceilings onbank credit to the private sector (except forexports) and the tightening of hire-purchaseterms.

Following sterling devaluation, the UnitedStates, Canada, and Sweden raised their discountrates and took other measures to tighten monetarypolicy. The United States raised the discount ratefrom 4 per cent to 4% per cent on November 20and brought about some increases in reserverequirements effective January 1968. Canada fol-



lowed its end-of-September increase of the dis-count rate to 5 per cent by a sharp increase onNovember 20 to 6 per cent and again, on Janu-ary 22, 1968, in the face of substantial short-termcapital outflows and pressures on the exchangerate, to 7 per cent, the highest level ever reached.Earlier, on December 15, 1967, against the back-ground of the November devaluation of sterlingand the defensive actions taken by other countriesnot devaluing, the Swedish authorities raised thediscount rate from 5 per cent to 6 per cent to meetspeculative capital outflows. To counter its emerg-ing balance of payments difficulties, Japan hadstarted tightening monetary policy as far back asApril 1967 and had raised the discount rate by0.36 percentage point to 5.84 per cent in Sep-tember 1967. As the balance of paymentsremained weak, the Bank of Japan raised the dis-count rate by a further 0.36 percentage pointfrom January 6, 1968.

While these industrial countries acted to tightendomestic monetary conditions in defense of theircurrencies in the situation created by risinginterest rates in the United States and by thesterling devaluation, a significant feature of thisperiod was the continuation of monetary ease insome important industrial countries. Belgium,Germany, Italy, the Netherlands, and Switzerlandmaintained their existing easy money policies.Belgium, in fact, brought about two reductions inthe discount rate before the U.K. devaluation,even after the upward tendency in interest rates inthe United States had become apparent andwhile increases in discount rates were taking placein both Canada and the United Kingdom. InFrance, no change was made in the discount rate,although some monetary measures were takenthat on balance appeared to have exerted a slightlyrestrictive influence on the money market. Sweden,which had raised the discount rate shortly aftersterling devaluation, cut the rate from 6 per centto 5y2 per cent on February 9, 1968.

In order to strengthen the international positionof the dollar and to curb inflationary pressures inthe domestic economy, the United States raisedthe discount rate from 4% per cent to 5 per centon March 15, 1968, and to 5% per cent onApril 19. On March 15 Canada also raised thediscount rate from 7 per cent to 1% per cent.After the announcement of strong measures offiscal policy in the budget, the United Kingdom onMarch 21 reduced Bank Rate from 8 per cent toll/2 per cent. On May 23 the U.K. authorities

reorganized the ceilings on bank credit to includeexport credit as well. The new ceiling on banklending to the private sector and overseas was fixedat 104 per cent of the level reached in Novem-ber 1967. Canada cut the discount rate back to7 per cent on July 2, 1968, in view of the improve-ment in its foreign exchange position. In France,as part of the measures taken to deal with thedifficulties following the wave of strikes, the dis-count rate was raised on July 3 from 3% per centto 5 per cent, a level that had not been reachedsince 1958. Earlier, on June 26, the preferentialdiscount rate on export credits had been reducedfrom 3 per cent to 2 per cent until June 1, 1969.

Sterling Devaluation

The devaluation of sterling in November 1967was perhaps the most important single financialevent of the year. It was undertaken because itbecame increasingly evident that a satisfactoryrate of growth for the United Kingdom was diffi-cult to reconcile with balance on the externalaccounts at the current exchange rate of sterling.The events leading up to sterling devaluation arebriefly reviewed below.

By the early summer of 1966, unemployment inthe United Kingdom had reached an extremelylow level. Wage earnings continued to rise and theexternal trade deficit, aggravated by the seamen'sstrike in May and June 1966, remained large.Massive speculative pressure built up againststerling in June and July, and the authorities madeextensive use of foreign short-term assistance. OnJuly 20, 1966, measures were announced to elimi-nate excessive demand at home and check therise in costs and prices in order to speed up theadjustment in the external accounts, and to restoreconfidence in sterling. These included a six-monthperiod of "prices and incomes standstill" to befollowed by a six-month period of "severerestraint." Throughout August sterling remainedweak in the foreign exchange markets and theBank of England was forced to support theexchange rate on a large scale. By September,however, confidence increased, and sterling cameinto demand after the announcement of a furtherextension of supporting facilities by foreign cen-tral banks. At the end of November 1966, thetemporary surcharge on certain import duties,which had been imposed in October 1964 at therate of 15 per cent on the c.i.f. value and reducedin April 1965 to 10 per cent, was abolished.



The United Kingdom's external position im-proved in the fourth quarter of 1966; this improve-ment continued into the first quarter of 1967,when there was some expansion in output anddemand and the performance of exports was notunsatisfactory. At the beginning of the secondquarter there was optimism about the course ofevents in the future. In presenting the budget inApril, the Chancellor of the Exchequer anticipatedthat there would be an acceleration in the pace ofeconomic activity. No major stimulating measureswere introduced in the budget although ceilings onbank lending to the private sector were removed.Earlier in the year Bank Rate had been reducedin two equal steps from 7 per cent to 6 per cent.In May 1967 the rate was again reduced by 0.50percentage point.

By the end of the second quarter, it was appar-ent that the expected acceleration in the pace ofeconomic activity was not taking place. There wasvery little increase in seasonally adjusted real finaldemand between the first two quarters. Through-out this period, imports were high and rising andexports remained sluggish. Meanwhile, unemploy-ment continued to grow. In order to stimulatedemand, hire-purchase controls were relaxed inJune and again in August 1967. Several timesduring the year, payments of investment grantswere accelerated. When the period of "severerestraint" in prices and incomes came to an endat mid-19 67, wages started to rise—sharply inJuly and more moderately afterward. In the thirdquarter, consumer expenditures increased and therise in unemployment was checked.

In the meantime, other important developmentshad taken place affecting the position of sterling.In May 1967 disappointing foreign trade figuresfor April, rising interest rates in other financialcenters, and disturbances in the Far East, togetherwith the circumstances surrounding the Britishapplication for membership in the European Eco-nomic Community and the speculation thisaroused about the future role of sterling, alltended to put pressure on sterling in exchangemarkets. As a result, the covered interest differen-tial between Euro-dollars and three-month localauthority deposits in the United Kingdom shiftedin favor of Euro-dollars and an outflow of fundsfrom London began. The outbreak of hostilities inthe Middle East in June and the closing of theSuez Canal brought further pressure on the pound,and, as the covered interest rate differential

widened, funds continued to flow out at an increas-ing rate.

During the third quarter of 1967, the weaken-ing tendency in sterling continued. Dock strikes inLondon and Liverpool and sluggish demand con-ditions in Western Europe contributed to theweakening of British exports at this time. Through-out this quarter, there was a large outflow offunds from London. However, with unemploy-ment high, the British authorities did not raiseBank Rate during this quarter. As sterling cameunder heavy pressure, the United Kingdom sus-tained large and growing losses of externalreserves. The resources made available to theUnited Kingdom by other central banks and mone-tary authorities for the support of sterling becameseriously depleted.

In view of the mild reflationary measures intro-duced during the third quarter, the growing labordisputes, the poor trade results of September, andrising interest rates in U.S. and Euro-dollar mar-kets, pressures on sterling increased sharply inOctober. In an effort to stem the large foreignexchange losses, Bank Rate was increased onOctober 19 and then again on November 9, butthese steps did not prove sufficient to restoreconfidence in sterling. Speculation increased andreached a climax just before devaluation tookplace on November 18. The pound was devaluedby 14.3 per cent; its parity was reduced from<£ 1 = US$2.80 to <£ 1 = US$2.40.

Within ten days of the sterling devaluation, 14other member countries also devalued.3 Most ofthese were countries with close economic andfinancial ties with the United Kingdom; otherswith ties less close saw the time as opportune fortaking steps that had previously become necessary.However, the U.K. action was not followed byanything like the general adjustment of exchangerates that followed the 30.5 per cent sterlingdevaluation in 1949.

The Short-Term Money Market

The successive reductions in official discountrates during the first three quarters of 1967, whichin some countries were associated with reductionsin official reserve requirements or removal ofrestraints on lending by certain financial institu-tions, presaged a general easing in the availability

5 See Supplementary Note A, page 97, and Table 28.



of credit in most of the money markets in Europeand North America. Further, the comparativelylarge public sector cash deficits, and in continentalEuropean countries their substantial over-all bal-ance of payments surpluses, also tended toincrease domestic bank liquidity over the year asa whole. Consequently, commercial bank depositsin most countries rose at exceptionally rapidrates, particularly through the latter part of 1967and early 1968. During the earlier part of 1967in France and Germany, the growth in the moneysupply (currency and demand deposits) was mod-est, as in the United Kingdom. Nevertheless, forthe year as a whole the supply of money increasedmarkedly. In almost all the main industrial coun-tries there was a substantially greater increase inquasi-money (largely time and savings depositsin the commercial banks). Considerably higherliquidity of households was a marked feature ofmonetary developments in 1967 and early 1968.

The rise in bank deposits led, however, to asubstantial increase in bank liquidity, as thedemand for commercial loans was, in most coun-tries, comparatively slack. For example, in theUnited States business loans expanded by 10 percent in 1967, compared with 13 per cent in theprevious year, and a considerable amount of thisborrowing was concentrated in the first half of theyear and was associated with the accelerated cor-porate income tax payments. In Germany privatedemand for bank credit, after declining throughthe first half of the year in line with the recessionin domestic activity, rose quickly only in the lasttwo months of the year with the revival of activity.In Sweden the banks' net lending showed a pro-nounced decline in the latter part of 1966 thatcontinued through the first half of 1967. Aftermid-year bank lending began to grow quickly,particularly in the form of building credits. InBelgium, also, the demand for bank creditremained sluggish particularly during the first halfof the year, while in the Netherlands the demandfor credit remained fairly buoyant throughoutmost of the year. In those countries that had initi-ated programs of expansion earlier, and main-tained them through 1967—outstandingly Italy,and to a lesser extent France—the privatedemand for credit rose markedly throughout theyear. In the United Kingdom, particularly afterthe removal of the ceiling on clearing bankadvances, credit to the private sector rose steadily

through the latter part of the year, and in Canadathe private demand for credit was running con-siderably above that of the previous year.

In almost all cases, however, the rise indeposits for the year as a whole outstripped therise in bank credits to the private sector. Bankfinance to the government sector, in the form ofboth new government issues on the securities mar-kets and direct loans to government agencies andorganizations, rose considerably during 1967. Inalmost all countries, with the particular exceptionof France, the rate of increase in financialresources to the government sector was consider-ably in excess of that in the previous year. In thissense the comparative ease in money market con-ditions (Chart 15) was an important adjunct tothe growth of government expenditures, whichwas itself a significant element of anticyclicalpolicy in most countries during the year.

Although the degree of variation in interest ratepatterns among the various continental Europeancountries was quite marked—reflecting in partdomestic considerations and institutional differ-ences—the general trend in rates was downwardor comparatively stable. This is, perhaps, the out-standing contrast with the previous year and withdevelopments in the reserve currency centers andin Canada and Japan. This marked pattern ofinterest rate movements between the two groupsof countries was, nevertheless, accompanied ineach by comparatively easy money supply condi-tions. Generally, there was a narrowing of inter-national interest rate differentials between thetwo reserve currency centers and the other mainindustrial countries, but on a covered basis short-term interest rate differentials between the UnitedKingdom and the other countries widened con-siderably (Chart 16). The high cost of forwardcover for sterling, reflecting the operation of theconfidence factor, was important in this connec-tion, particularly during the latter part of the year.The international movement of short-term fundswas thus extremely complex during the year andpresented the Euro-currency markets and theofficial network of swap arrangements and centralbank intervention in the international money mar-kets with their greatest challenges.

The Euro-currency markets bore the brunt ofthe movements of funds among the various inter-national financial centers. The swap network wasutilized in part to cushion the impact of private



CHART 15. SHORT-TERM INTEREST RATES, 1964-MAY 1968


short-term capital movements on official reserves,while central bank intervention in the Euro-currency markets was an important factor in limit-ing the rise in interest rates in that market, whichmight otherwise have led to a generally higherstructure of interest rates in domestic moneymarkets.

Conditions in the international money markets—of which the Euro-currency markets are, pehaps, the most sensitive part—were generallycomplex during the year. Significant patterns can,however, be traced. The United Kingdom, whichin the early months of 1967 experienced a large-scale inflow of funds, suffered for the year as awhole from a substantial withdrawal of short-termfunds. By December 1967 the foreign currencyposition of U.K. banks was positive to an amountof <£38 million; net liabilities in sterling to non-official holders fell by £250 million betweenMarch and December 1967. The continentalWestern European countries also, taken as agroup, exported a considerable volume of short-

term capital over the year, despite the large flowof funds into certain countries at the time of theMiddle East crisis and of the devaluation ofsterling. After mid-year Canada lost a considerablevolume of funds, which, as in the case of theUnited Kingdom, went largely to the UnitedStates. The bulk of short-term funds exported bycontinental Western Europe was channeledthrough the London market4 to the United Statesand Japan.

The flow of short-term funds from those coun-tries of Europe in balance of payments surplusto the United States and Japan reflected to a con-siderable extent domestic interest rate develop-ments. Despite the ample volume of credit in theUnited States, short-term interest rates rose rela-tive to those in Europe and after mid-year U.S.

4 Foreign currency liabilities of U.K. banks to WesternEurope rose by £721 million in 1967, while their assetsin the United States rose by £465 million and in Japanby £200 million. These figures include the effects of theappreciation of sterling values following devaluation.



CHART 16. COVERED THREE-MONTH ARBITRAGE MARGINAND U.K. PRIVATE SHORT-TERM CAPITAL,

1966-JuNE 1968

COVERED THREE-MONTH ARBITRAGE MARGIN(In per cent per annum)

banks were active bidders for funds in Europe;the tightening of credit conditions in Japan alsopulled in funds from the rest of the world. InCanada and the United Kingdom, special factors,as well as interest rate structures that on a coveredbasis differed from the structure of rates in NewYork, led to a considerable outflow of funds.

Despite the pull of funds to New York, and therise in interest rates there from about May onward,the rise in interest rates on Euro-dollar depositswas fairly modest until November 1967 (Chart15). Indeed, such rates were no higher in Octoberthan they had been in February 1967—althoughin the course of that period they had fluctuated.To a considerable extent, the comparative stabilityduring this period was due to the placing of sub-stantial deposits by various central banks in themarket, thus replacing funds that had been drawnout by private investors.

During the period starting shortly before theNovember 1967 sterling devaluation and con-tinuing for some time, there were intense specula-tive movements of funds between the leading inter-national money markets. Not only were there

shifts of funds into certain currencies of WesternEurope, but there was a massive demand for goldthat drained substantial reserves from the activeparticipants in the gold pool.5 At first, rates onEuro-dollar deposits rose sharply; but the rise wasshort lived, partly because of the placing of officialfunds in the market and partly because of the factthat traditional year-end tightness was alleviatedthrough various central banks undertaking swaptransactions with their commercial banks that en-couraged these banks to place funds in the market.These actions led to remarkable smoothness inthe working of the market despite the confusednature of the flows of funds through it.

The Long-Term Capital Market

The extremely heavy pressures that were amarked characteristic of the securities markets ofalmost all the main industrial countries in 1966were felt much less acutely in the first half of1967. In general, the easing of pressures followed,and was in part caused by, the relaxation of mone-tary policy in some of the leading countries overthe period. There was a sharp fall in short-terminterest rates in the early months of 1967, as wellas slight declines in the interest rate cost of long-term security issues in most of the industrial coun-tries. Medium-term and long-term rates declinedless and over a shorter period, so that the spreadbetween long and short rates was unusually wideover much of the year.

In the United States, the Treasury's net borrow-ing in the second half of 1967 was exceptionallylarge. Private demand for funds also continuedto be high as a result of uncertainty about thefuture movement of interest rates and of desiresto restore the level of corporate liquidity loweredby the 1966 credit squeeze and accelerated 1967corporate tax payments. At the same time, thelarge rise in savings by households was channeledmainly into the acquisition of short-term liquidassets rather than into the capital market proper.The securities markets were thus subjected toconsiderable pressure and long-term interest ratesrose markedly from the second quarter of 1967(Charts 17 and 18). Developments in the Cana-dian bond market tended to follow closely thosein the United States. In the United Kingdom, the

5 See Chapter 7.



CHART 17. LONG-TERM GOVERNMENT BOND YIELDS, 1964-MAY 1968


rise in rates during the second half of 1967 wasdominated largely by the external situation—therise of interest rates in North America, the weak-ness of the U.K. balance of payments, and thecontinued weakness of confidence in sterlingthrough the summer and early autumn of 1967.The flow of new private securities to the marketwas considerably smaller than in the previous year.Although Exchequer borrowing was substantiallyhigher, the fact that a considerable volume of gov-ernment issues was placed with the banking systemtended to mitigate the upward pressure on interestrates.

In the United States and the United Kingdom,medium-term and long-term rates were consist-ently higher than short-term rates until towardthe end of 1967 (Chart 19) and, in contrast tomost other countries, the trend in long-term rateswas generally upward. In these two countries,along with Canada, the downward trend of inter-est rates was reversed sooner than in most othercountries. Long-term rates in the United Statesrose from February onward; short-term rates

advanced after mid-year and, by the beginning of1968, yields on securities with two to three yearsto maturity were considerably above longer-termyields. In the United Kingdom, the yields on gov-ernment securities reached their lowest levels inMay 1967 and, thereafter, moved up steadilythrough the year. After the devaluation of sterlingand the increase in Bank Rate to 8 per cent, long-term interest rates—which were still high—roseonly slightly. The yield structure changed mark-edly, with short rates being considerably abovelong-term yields.

In continental Western Europe, bond ratesdeclined during the first half of 1967 and remainedat their reduced levels or rose slowly during thesecond half. Conditions in the long-term securitiesmarkets were essentially similar for this wholegroup of countries, with insistent demand forfunds by the public sector and comparativelyweak demand in the private sector. Long-terminterest rates were held down by monetary policiesthat were deliberately aimed at preventing sharpincreases in such rates at a time of comparatively



CHART 18. SELECTED COUNTRIES: INDUSTRIAL BOND YIELDS, 1964-MAY 1968


slack aggregate demand. In Germany, open mar-ket operations in 1967 were for the first timedirected at the long-term end of the market. Incontinental European countries, the level of inter-est rates in the Euro-issues market indicated thefloor below which any fall of domestic interestrates operated as a stimulus to an outflow ofcapital. Long-term interest rates were in factmaintained at comparatively low and stable levelsin Italy and Switzerland, while they were falling,though still relatively high, in Germany andBelgium. As a result, there was a substantial out-flow of long-term funds from these countries. InGermany, there was considerable switching out ofGerman bonds held by foreigners into the Euro-issues market because German rates were fallingand German securities became unattractive to for-eigners after deduction of the 25 per cent with-holding tax. In France, where yields on long-termbonds remained stable, the outflow of long-termfunds was much smaller.

The international bond market in Europe has

expanded rapidly in the last few years (Table 12).An important factor in this expansion since 1964was increased borrowing by U.S. corporations fortheir overseas operations. In 1967, however, therewas a large increase in issues by borrowers fromother industrial countries, mainly on the Swissmarket, and a notable growth in borrowing byprimary producing countries. The increase ininternational issues on the U.S. securities marketin 1967 was due almost entirely to larger borrow-ings by less developed countries and internationalinstitutions, although Canadian borrowing con-tinued to account for a large proportion of suchissues.

The large rise in U.S. corporation borrowingabroad was, of course, a direct result of the thenvoluntary balance of payments program of theU.S. Government. The inducement to borrowabroad was further enhanced by the rise in inter-est rates in the United States, so that the interestcost differential between the United States andthe Euro-issues market narrowed considerably



CHART 19. TERM STRUCTURE OF INTEREST RATES


10 15Years to Maturity

during the course of 1967. The increased flow offunds to the market resulted from the rise of inter-est rates in this market relative to rates in thedomestic security markets of Europe, which hasbeen discussed earlier.

New issues of international bonds reached rec-ord levels in the first half of 1968, when offeringswere of much the same magnitude as recorded forthe full year 1967. This growth was heavily con-centrated in the European capital markets, whichwere called upon to absorb a massive increase inEuro-bond issues by U.S. companies and also asubstantial volume of conventional foreign bondofferings by governments and international institu-tions.

The increased demands made by U.S. com-panies on the Euro-bond market stemmed, inlarge part, from the mandatory restraints imposedby the United States on direct investment outflows;these restraints had the effect of shifting borrow-ings by foreign affiliates of U.S. companies fromthe United States to European markets. Over thesix months to June 1968, issues of Euro-bonds byU.S. companies approached $1.5 billion, con-

trasted with issues totaling about $0.3 billion inthe corresponding period of 1967. At the sametime, issues by non-U.S. companies on this marketwere less than half the amount recorded a yearearlier.

Conventional foreign bonds offered on Euro-pean markets in the six months to June 1968totaled close to $0.5 billion, which was appre-ciably higher than a year earlier and about onethird above the level reached in the latter half of1967. Offerings on the German market by govern-ments and international institutions were particu-larly heavy in May and June, totaling more than$0.2 billion. Switzerland was again an importantmarket for these issues, and modest-sized offeringswere placed on five other European markets.

Data available on the sources of these funds aremeager, but Germany, Italy, and Switzerlandseem to have been important suppliers of funds.In Germany and, to a lesser extent, Italy, officialpolicy has encouraged long-term capital outflowsto offset large current account surpluses. Over thefive months to May 1968, the outflow on account

TABLE 12. NEW ISSUES OF INTERNATIONAL BONDS INEUROPE AND NORTH AMERICA, 1963-67


Borrower 1963 1964 1965 1966 1967

Issued in EuropeIndustrial countries

EEC countriesScandinavian countriesJapanOther industrial countriesU.S. companiesOther international

companies a

Primary producing countriesof whichAustralia, New Zealand,

and South Africa

International institutionsof whichEuropean institutions

Totalof whichForeign bondsEuro-bonds and other

international bonds

Issued in the United StatesCanadaOther developed countriesLess developed countriesInternational institutions

Total

Issued in Canada

Grand Total

3877537255923—

27

142

90

56

56

60310025819933—

13

181

59

175

150

9752472373560

372

24

187

138

221

722

1,175753702

—78564

278

230

709

657

247

1,620348197

—757657

273

537

245

532

200

585 959 1,383 2,062 2,689

375 330 267 645 458

210 629 1,116 1,417 2,231

734 725 781 943 1,018581 51 108 24 15126 375 281 130 239— 5 200 175 510

1,440 1,155 1,370 1,271 1,782

— 5 32 40 20

2,025 2,119 2,785 3,373 4,491

Sources: IBRD and Fund staff estimates for bonds issued inEurope; U.S. Department of Commerce for bonds issued in theUnited States.

1 Including German and Italian investment companies incor-porated in Luxembourg.


58

ANNUAL REPORT, 1968

of portfolio investment (net) from Germanytotaled '$0.4 billion; German residents have takenup the great bulk of the bonds denominated indeutsche mark and in addition have purchasedsizable amounts of Euro-bonds and other foreignofferings.

An important consequence of the rapid growthof the Euro-issue market has been to draw moreclosely together the long-term interest rate patternsof those markets that are comparatively free ofcontrols on international capital flows. Capitalmarkets in continental Western Europe, beingcomparatively free of such controls, tended tobecome more integrated during the year; the freeflow of international capital has tended to equalizeinterest rates in those markets. In general, inter-national flows of long-term capital during 1967and early 1968 tended to be of an equilibratingnature.

Restraints on International CapitalMovements

In 1967 progress in dismantling restraints oncapital transfers or capital transactions was madeby certain industrial countries. The United States,however, intensified its restraints on internationalcapital transactions and the United Kingdommaintained most of its restraints.

In the United States, the voluntary capital out-flow programs, first introduced in 1965, continuedto operate in 1967 under generally more restric-tive guidelines. The guidelines originally plannedfor 1968 as announced in November 1967 fol-lowed the pattern of increasing restrictiveness. Inthe balance of payments program announced onJanuary 1, 1968, however, the restraints oncapital outflows were strengthened and enlarged inscope. The most important change was the intro-duction of a mandatory program to curb directinvestment abroad. It was also announced that thevoluntary program for banks and other financialinstitutions, administered by the Federal ReserveSystem, was being tightened and that the Board ofGovernors of the System had been given stand-byauthority to invoke mandatory controls shouldsuch controls become desirable or necessary. Forthe calendar year 1968, the new payments pro-gram as a whole was originally expected by theU.S. authorities to yield balance of payments"savings" totaling $3 billion, of which $1 billion

would result from the measures to curb directinvestment outflows and $0.5 billion from thetightening of the voluntary program for banks andother financial institutions.6

The mandatory direct investment program thatbecame effective on January 1, 1968 providedfor a moratorium on U.S. direct investment (apartfrom some reinvestment out of current earnings)in many developed countries in continentalEurope and in South Africa (Schedule C), andlimited such investment (including reinvestmentout of earnings) in other countries—to 65 percent of a base-period average in a group of devel-oped countries outside continental Europe andsome less developed countries (Schedule B) andto 110 per cent of the base-period average in mostless developed countries as a group (Schedule A).In general, the "direct investment" subject tolimitation includes both new capital outflowsfrom U.S. resident direct investors to their foreignaffiliates and reinvested earnings of those affiliates.Long-term funds raised abroad, however, can beinvested outside the specified ceilings for therespective areas. In addition to the limitations ontheir investments in affiliated enterprises abroad,U.S. direct investors are subjected, by the sameregulations, to mandatory repatriation of a pre-scribed share of total earnings and mandatoryrepatriation and limitation of short-term financialassets held abroad.

Under the revised program for financial institu-tions, the ceilings on foreign credits by banks werereduced from 109 per cent to 103 per cent of theamount outstanding at the end of 1964, except forthose of banks having relatively small assetsabroad. The banks were also asked (independentlyof their over-all ceilings) not to renew maturingterm loans to developed countries of continentalEurope and to reduce outstanding short-termloans to those countries by 40 per cent dur-

(J In addition to the measures controlling capital out-flows, the new U.S. payments program included a pro-posal for congressional action to reduce the balance ofpayments impact of foreign travel by U.S. residents;reductions of net government expenditures abroad partlythrough negotiations designed to minimize the foreignexchange costs of maintaining U.S. troops in Europe;consideration of possible legislative measures in thearea of tax rebates on exports and special border taxcharges, depending on the outcome of negotiations aimedat reducing the international trade impact of differencesamong national tax systems; more intensive efforts topromote exports; and the development of new incentivesfor foreign investment and travel in the United States.



ing 1968, at the rate of 10 per cent a quarter.As these reductions in loans to European coun-tries took place, the guideline ceilings for individ-ual banks would be reduced correspondingly.Under the new program, nonbank financial institu-tions were requested to reduce their holdings ofcovered foreign assets from the level of Decem-ber 31, 1967 by at least 5 per cent. In addition,holdings of liquid funds abroad were to be reducedto zero, or to the minimum working balancesrequired to conduct foreign business activities,even if this entailed a decline of more than 5 percent in covered foreign assets. Nonbank financialinstitutions were also requested to refrain frommaking any new loans or investments in developedcountries of continental Europe other than thoseto finance U.S. exports.

In March, Canada was granted exemption fromthese new capital-control measures, while itselfundertaking (1) to insure that the exemption wasnot used to by-pass the U.S. program and (2)to invest its official reserve holdings of U.S. dollars(apart from necessary working balances) in non-liquid U.S. Government securities. In April, theU.S. direct investment program was amended topermit investors to carry forward into subsequentyears any part of their investment quota not usedup in 1968, and also to allow investors not desir-ing to carry unused quotas forward to shift themfrom Schedule C countries to countries listed inSchedules B and A, and from Schedule B countriesto those in Schedule A.

During 1967 the U.S. Interest Equalization Taxwas amended and extended for two years beyondJuly 31, 1967, and the Administration was givendiscretionary power to vary the effective rate ofthe tax within a range corresponding to interest-rate equivalents from zero to approximately 1.5per cent per annum on the borrowed amount (orwithin a commensurate range on equity securi-ties). On August 28, 1967 the rate for acquisitionof equities was set at 18.75 per cent of their value,and the range of rates for acquisition of debt obli-gations with at least one year remaining to matu-rity was set at 1.31 per cent to 18.75 per cent oftheir value. The new rates, which applied to acqui-sitions made on or after August 30, 1967, corre-spond to an annual interest-rate equivalent of

approximately 1.25 per cent, compared with1 per cent prevailing earlier. During the yearmeasures to prevent evasion of the tax werestrengthened while the exemption granted to Japanwas broadened.

In France the abolition of exchange controlannounced at the end of 1966 came into force inJanuary 1967. The franc, which was externallyconvertible, became internally convertible. How-ever, certain transactions, as opposed to payments,were still kept under control. For example, Frenchdirect investment abroad and foreign direct invest-ment in France still had to be declared to theauthorities, who had the right to request theirpostponement. However, in May 1968 France, asa temporary measure, reintroduced exchange con-trol and restricted outward transfers on capitalaccount.7 Exempt from restrictions were transfersto Monaco and to the countries whose bank ofissue is linked to the French Treasury by anOperations Account.8

In Japan measures were introduced, effectivefrom July 1, 1967, to liberalize inward foreigninvestments. The new measures raised the limitsunder the automatic approval system applied bythe Bank of Japan on stock purchased by foreign-ers in the securities market (for purposes otherthan participation in management) and also pro-vided for an automatic approval system to beapplied to direct foreign investment aimed atsetting up subsidiaries or joint ventures in certainindustries in Japan. The Netherlands issued vari-ous open general licenses permitting banks andnonbanks to engage freely in spot and forwardtransactions in foreign currencies, to deal in for-eign money market paper, and to grant credit tononresident banks. In Switzerland banks couldagain pay interest on all foreign funds in Swissfranc accounts and were no longer obliged to offsetany net addition to foreign-held Swiss francdeposits.

7 In addition, in June the French authorities announcedcertain temporary foreign trade measures. Measures topromote exports included the extension of "economicrisk" insurance and the setting up of an export indemnityscheme. Measures to restrict imports included certainquota restrictions.

8 Cameroon, Central African Republic, Chad, Congo(Brazzaville), Dahomey, Gabon, Ivory Coast, MalagasyRepublic, Mali, Mauritania, Niger, Senegal, Togo, andUpper Volta.


Chapter 6

Developments in Primary Producing Countries

HE growth of output in the primary pro-ducing countries1 was held down in 1966

by bad agricultural conditions in many areas.Weather conditions and crop prospects improvedin the course of 1967 on the Indian subcontinent,in parts of South America, and in some moredeveloped primary producing countries. Despitea worsening in some other areas, the growthof agricultural production in the primary pro-ducing regions as a whole accelerated in 1967and early 1968. However, during 1967 this stimu-lus to total output was offset by the dampeningeffect of slower export growth and the neces-sity in many countries of limiting the expansionof domestic demand and curbing the growth ofimports in order to protect external paymentspositions. Estimates of output in 1967 are notyet available for all the primary producing coun-tries and are in any case subject to a considerablemargin of error, but it seems unlikely that theincrease from 1966 in these countries takentogether was much different from the increase of4 to 4l/2 per cent recorded from 1965 to 1966.

The exports of individual primary producingcountries were influenced by a great variety ofdevelopments: changes in demand and com-modity prices cut back the export earnings ofmany countries but were favorable to a limitednumber; wars and political disturbances inter-rupted the flow of goods, particularly petroleum,from some countries while others were able toexport increased amounts; and, as usual, theweather was kinder to some parts of the worldthan to others. But underlying these importantlocal influences, and conditioning the environmentfor virtually all primary producing countries, wasthe fact that the value of industrial countries'imports from them rose little from the third quarterof 1966 until late in 1967. Total exports fromprimary producing countries rose by only 4 percent from 1966 to 1967, compared with 8 per centfrom 1965 to 1966.

1 See footnote 1, page 27, and footnote 1, Table 13.

Industrial Country Markets forPrimary Producing Countries

In 1966, 70 per cent of exports from theprimary producing regions was sold to industrialcountries, roughly the same share as in 1962(Table 13). The relative importance in 1966of markets in industrial countries varied from63 per cent for the less developed countries ofAsia, which have substantial trade within theirown region, to 82 per cent for the African coun-tries. The movement toward closer trading rela-tionships within various regions of the primaryproducing world has resulted in a rapid growthof trade within some regions: for instance, tradeamong Latin American countries rose by 80 percent from 1962 to 1966 while their exports toindustrial countries increased by only about20 per cent. There has also been a strikingincrease in exports to CMEA countries, main-land China, etc., from most of the groups ofprimary producing countries shown in the table,and in total these exports were 80 per cent higherin 1966 than in 1962. (The trend for Australia,New Zealand, and South Africa is distorted byan unusually low level of Australian wheat salesto mainland China in 1966.) Nonetheless, thesetrade flows are still small compared with the flowof exports to industrial countries.

Imports of the United States and industrialEurope (including the United Kingdom) fromprimary producing countries showed a slower risein 1966 and tended to decline during the firsthalf of 1967 (Chart 20). Although Europeanimports began to recover around mid-1967, thoseof the United States continued to decline in thethird quarter and firm recovery of total U.S.imports of primary products was not establisheduntil the fourth quarter of the year. The weaknessof these markets led to a marked reduction ingrowth, or actual reductions, of total industrial-country imports from most of the primary pro-ducing regions. The main exception to this pat-tern was eastern Asia, where a few countries that

60

T


DEVELOPMENTS IN PRIMARY PRODUCING COUNTRIES 61

TABLE 13. PRIMARY PRODUCING COUNTRIES: EXPORTS, 1962 AND 1966a

(Amounts in millions of U.S. dollars)

To IndustrialCountries

To Primary Producing Countries

Same region

Percentage PercentageValue of total Value of total

Exports fromWestern European countries

19621966

Percentage increaseAustralia, New Zealand, and

South Africa19621966

Percentage increaseLatin America

19621966

Percentage increaseOther Western Hemisphere

19621966

Percentage increaseAfrica

19621966

Percentage increase

Asia19621966

Percentage increase

Middle East19621966

Percentage increase

All primary producingcountries

19621966

Percentage increase

2,7834,09247.0

3,1884,15130.2

6,5417,97627.9

1,1271,34419.3

4,0886,28053.6

3,8205,42642.0

3,5684,84035.7

25,11534,10935.8

68.064.6

71.070.1

75.671.6

72.378.8

80.782.1

60.062.7

67.067.0

70.770.2

14525575.9

20330952.2

6481,16880.2

1081178.3

25234436.5

1,2261,55026.4

33244233.7

3.53.7

4.55.2

7.510.5

6.96.9

5.04.5

19.317.9

6.26.1

8,13611,032

35.6

Other

To CMEACountries,Mainland

China, etc.2Unclassified

Exports

Percentage Percentage PercentageValue of total Value of total Value of total

57486350.3

7511,18557.7

1,0931,38726.9

263191

-27.4

52773940.2

9391,10077.7

1,0751,38228.6

22.922.7

14.013.6

16.720.0

12.612.4

16.911.2

10.49.7

14.812.7

20.219.1

5331,075707.7

16418472.2

199405

703.5

5

—

13823570.3

31852264.2

23946594.6

1,5962,886

80.8

13.017.0

3.73.1

2.33.6

0.3

2.73.1

5.06.0

4.56.4

4.55.9

5945

-23.7

18188

-57.4

16719818.6

5754-5.3

6151

-76.4

5851

-72.7

11394

-16.8

696581

— 76.5

1.40.7

4.01.5

1.91.8

3.73.2

1.20.7

0.90.6

2.11.3

2.01.2

TotalExports 3

4,0936,33054.6

4,4875,91737.9

8,64811,13328.7

1,5591,7069.4

5,0667,64857.0

6,3618,64936.0

5,3267,22235.6

35,54048,60536.8

Source: International Monetary Fund and International Bank for Reconstruction and Development, Direction of Trade.1 The coverage of each area in the table accords with the grouping used in Direction of Trade and in International Financial Statistics.

That is to say, "Western Europe" includes Finland, Iceland, Greece, Portugal, Spain, Turkey, and Yugoslavia. "Africa" excludes the UnitedArab Republic as well as South Africa, and the Middle East includes Aden (South Yemen), Bahrain, Cyprus, Iran, Iraq, Israel, Jordan,Kuwait, Lebanon, Muscat and Oman, Qatar, Saudi Arabia, Syrian Arab Republic, Trucial States, United Arab Republic, Yemen, and otherArab states.

2 Members of the Council for Mutual Economic Assistance are Albania, Bulgaria, Czechoslovakia, Eastern Germany, Hungary, Mongolia,Poland, Rumania, and the Union of Soviet Socialist Republics. In addition to these countries and mainland China, the group includes Cuba,North Korea, and North Viet-Nam.

3 Differs from data on total trade in other tables in this Report, largely because of incomplete reporting for Direction of Trade.

export a high proportion of manufactured goodsand also trade heavily with Japan experiencedcontinued rapid growth of their exports. Mostother Asian countries did much less well in theirindustrial-country markets, but the strength ineastern Asia sustained a moderate upward trendin total Asian sales to industrial countries throughmost of 1966 and 1967.

There was a substantial decline in 1967 in theindustrial countries' imports from Africa, despitea strong recovery in the fourth quarter. This areaexports mainly to Europe and was severely affectedby the European economic slowdown; also, theexports of a number of African countries werecut back as a result of local political develop-ments. Industrial-country imports from the Middle

East were greatly affected by the hostilities of mid-1967 and their aftermath, as well as by the slow-ing of aggregate demand, particularly in Europe.Total imports of industrial countries from thearea were no higher in the second quarter of1967 than a year earlier. After mid-1967, how-ever, there was an extraordinarily rapid increaselargely because of the building up of petroleuminventories in the industrial countries and of highershipping costs.

The imports of the United States from manyof the developing countries in the WesternHemisphere declined during 1967. Although thesales by these countries to Japan continued to risesteadily, and the petroleum producing countriesof the region were able to ship substantial amounts



CHART 20. IMPORTS OF INDUSTRIAL COUNTRIES FROM PRIMARY PRODUCING COUNTRIES,1964-67

(1964 = 100; quarterly, seasonally adjusted)



during the Middle East crisis, there was only amoderate increase in total industrial-countryimports from the developing countries of theWestern Hemisphere during 1966 and most of1967. A decline in the fourth quarter of 1967arose principally from the outbreak of foot andmouth disease in the United Kingdom as a resultof which meat imports from countries where thedisease was endemic were banned; Argentina andUruguay were among the countries affected by theban.

New Zealand's export receipts, suffering fromthe fall in wool prices, declined by about 8 per centfrom 1966 to 1967. However, the exports ofboth Australia and South Africa rose more rapidlythan from 1965 to 1966, benefiting from improvedsupplies of agricultural products and from sub-stantial increases in sales to Japan, which is nowAustralia's largest export market. The industrialcountries' imports from the European primaryproducing countries continued to rise until thefirst quarter of 1967 and then leveled out untilthe fourth quarter. The increase from 1966 to1967 was 9 per cent, larger than for other primaryproducing areas but well below the increasesrecorded in 1965 and 1966.

In summary, the slower growth of demandin industrial countries, the associated declinesin primary product prices, and adverse condi-tions in some areas had a pronounced impacton the total export receipts of most of the lessdeveloped countries in 1967. The export receiptsof almost all of the more developed primaryproducing countries, and of a few less developedcountries with substantial exports of manufacturesto industrial markets (China, Korea, Hong Kong,and Israel), again expanded considerably from1966 to 1967. There was one other major groupof countries whose exports rose in value, namely,those petroleum exporting countries whose exportswere enhanced as a consequence of the MiddleEast crisis. The value of exports of the othergroups of less developed countries in Africa, Asia,the Western Hemisphere, and the Middle Eastdeclined (Table 14).

Developments in Commodity Markets

Variations in the rate of output expansion in theprincipal industrial countries during recent years

TABLE 14. PRIMARY PRODUCING COUNTRIES: CHANGES INEXPORTS OF VARIOUS REGIONS AND GROUPS OF

COUNTRIES, 1965-67

Percentage ChangesValue of Exports in Value of(f.o.b.) in 1966 Exports

(million U.S.dollars) 1965-66 1966-67 *

More Developed CountriesEurope 6,318Australia, New Zealand, and

South Africa 5,946

Less Developed CountriesWestern Hemisphere

Petroleum exporters 2 3,826All other countries 9,032

Total, WesternHemisphere 12,858

AfricaPetroleum exporters 8 1,617All other countries 5,969

Total, Africa 7,586

AsiaRepublic of China, Hong

Kong, and Korea4 2,110All other countries 7,674

Total, Asia 9,784

Middle EastPetroleum exporters 6,257

Iran 1,309Other countries 5 4,948

Israel4 503All other 1,012

Total, Middle East 7,772

Total, All PrimaryProducing Countries 6 50,570

13

6-2

6 —

136

192

72174

8

16-1

17— 2

10471

11— 7

Source: International Monetary Fund, International FinancialStatistics.1 Preliminary.2 Netherlands Antilles, Surinam, Trinidad and Tobago, and Vene-zuela. Venezuela accounted for 71 per cent of the total exports ofthese petroleum exporters in 1966.

3 Algeria and Libya.4 The exports of these countries include a high proportion ofprocessed and manufactured goods.5Aden (South Yemen), Bahrain, Kuwait, Iraq, Muscat andOman, Saudi Arabia, Trucial States, and Qatar.6 Includes areas not covered above, principally in Oceania.

have been reflected in the movement of prices forraw materials. Many factors influence the behaviorof individual commodity prices but, as Chart 21shows, during periods of particularly rapid growthin industrial production (weighted by each indus-trial country's imports) the index of prices ofnonfood commodities other than petroleum hastended to rise.2 Raw material prices increasedsteeply in the first half of 1966, when output inthe industrial countries rose more rapidly than ithad since 1964.3 Conversely, in periods of slowgrowth of industrial production, such as thesecond half of 1966 and the first half of 1967, the

2 Based on indices for metals and minerals and fornonfood agricultural commodities calculated by theNational Institute of Economic and Social Research,London.

3 Special circumstances in the period led to an unusu-ally large increase in copper prices which accentuatedthe upward movement of the raw materials price index.

7

88

9

7 3

5 3

9

9 8

4



CHART 21. PRICES OF PRIMARY PRODUCTS AND CHANGESIN PRODUCTION IN INDUSTRIAL COUNTRIES,

BY HALF YEARS. 1962-67

\1 Based on price indices in dollar terms, calculated by

the National Institute of Economic and Social Research,London, shown in Chart 22. Dotted line shows movementin prices quoted, i.e., sterling prices are not adjusted fordevaluation.

2 Changes in production are based on industrial produc-tion indices for individual industrial countries weightedby the value of their imports in 1963.

index of raw material prices has declined. Whenmore normal growth in the output of industrialcountries has been maintained, as from mid-1964through 1965, raw material prices have been moreor less stable.

The cyclical movement in raw material pricesover the last two years has been more pronounced

CHART 22. PRICES OF COMMODITIES EXPORTED BYPRIMARY PRODUCERS, 1962-FiRST QUARTER 1968

(1961 = 100)

for metals and minerals than for agriculturalnonfood commodities (Chart 22). However, inrecent years, the price fluctuations for minerals andmetals have taken place around a rising trend,while prices of agricultural raw materials havebeen tending downward. Among the major rawmaterials traded internationally, the level of pricesdeclined most severely from 1966 to 1967 forwool, rubber, sisal, and lead (Chart 23). SinceDecember 1966 the maintenance of tin pricesabove the floor price has required interventionthrough the international buffer stock—for thefirst time since 1963. Copper prices rose steeplyin 1966 when supplies were reduced by labordifficulties and political crises and, although theydeclined from late 1966 through the first half of1967, they rose again thereafter largely as aresult of the prolonged strike in the U.S. copperindustry.

The price index of foodstuffs (which accountfor about one half of the value of exports otherthan petroleum from primary producing countries)also strengthened in the first half of 1966, anddeclined in the latter part of the year. Prices ofcoffees, with the exception of robusta, continuedto fall during 1967 despite sharp reductions inquotas under the international agreement, andthe prices of most other foodstuffs also moveddown further. However, the combined indexshown in Chart 22 was at its lowest level in thesecond half of 1966, rising somewhat during1967 in consequence of the sharp increases inthe prices of cocoa and rice and a recovery ofsugar prices. The continued rise in cocoa pricesresulted from a small crop for the second consecu-tive year in Ghana, and from speculative buyingin the expectation of a fall in Nigerian suppliesbecause of the civil war. For rice, the growingimbalance between rising demand and slowlygrowing supplies, coupled with poor crops inmajor producing countries in 1966/67 and therestriction of exports by Thailand, a leadingexporter, drove prices up to a record level in1967.

Table 15 shows the recent changes in exportreceipts from certain of the principal commodi-ties entering into international trade that haveresulted from the movements of prices and fromchanges in quantities traded. The value of primaryproducing countries' exports of rubber, wool, andcotton fell steeply, as a consequence of lower



CHART 23. SELECTED PRIMARY PRODUCTS: AVERAGE PRICES, 1963-FmsT QUARTER 1968

(1961 = 100)

1 London Metal Exchange.



TABLE 15. PRIMARY PRODUCING COUNTRIES: CHANGES IN U.S. DOLLAR VALUE OF EXPORTS OF SEVEN PRIMARYCOMMODITIES * FROM MAJOR PRODUCERS, 1963-67

Value of Exports Share in Total Exp<of the Commodity of Country (Countr

in 1966 in 1966

(Million U.S. dollars)Wool (3.6)

Australia, New Zealand, and South AfricaArgentina and Uruguay

Cotton (3.2)(including U.S. exports)United Arab RepublicSudanSyrian Arab RepublicMexicoBrazilOther Western Hemisphere countries 3

East African countries 4

Other African countries 5

Other countries e

Rubber (2.2)MalaysiaIndonesiaOther Asian countries 7

African countries 8

Tin (1.2)MalaysiaBoliviaOther Asian countries "African countries 10

Coffee (4.8)BrazilColombiaOther Western Hemisphere countries "East African countries 12

Ivory CoastOther African countries 13

Cocoa (1.0)GhanaNigeriaIvory CoastOther countries 14

Copper (4.2)(including Canadian exports)ChilePeruZambiaCongoOther countries 15

1,6011,389

212

1,393(1,825)

32910089

221111213

9747

186

93848122317658

518258

939473

2,1737643284682851222063971447953

1211,870

(2,128)641186644266133

236

554951186

15155

16

3833167

217476

446415394015

59101723

73249357

5

Changes in Dollar Valuearts Over Preceding Yearles)

1964

Per Cent37

-20

-7(1)

-4-29-3

-13-5

104

-10-13

22

—48

102213414710202

30273530546

—2429-916

(16)7

182632-8

1965

-13-15

3

11(-3)

25-3

-1825

-107

13-12

25_

5-6-4-51920152021-8-7

-132

-3-18-23-4—7

-25— 11

15(13)201816-520

1966

555

4(— )-211225

14-813

-57

-11

—-5-2-4-9—-21378

-51

131726

-11-25-34

203339

(39)3354345639

1967 2

-15-15-15

-14(-9)-15

14-26— 35-18-23-16-916

-25-14-25-18-18

2-5-347

-24

-6-8-2

-10-8

-167

271193

68_ _

(5)8

15-9

1-12

Sources: International Monetary Fund, International Financial Statistics, country trade returns, and Fund staffestimates.

1 Figures in parentheses against each commodity indicate the percentage share in total exports of primary producingcountries outside Europe.

2 Preliminary.8 El Salvador, Guatemala, Nicaragua, Paraguay, and Peru.4 Malawi, Kenya, Tanzania, and Uganda.6 Burundi, Cameroon, Central African Republic, Chad, Mali, Nigeria, and Togo.6 Afghanistan, Turkey, and Pakistan.7 Ceylon, Thailand, and Viet-Nam.8 Nigeria and Liberia.9 Indonesia and Thailand.10 Democratic Republic of Congo, Nigeria, and Rwanda.11 Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, and

Peru.12 Ethiopia, Kenya, Malagasy Republic, Tanzania, and Uganda.13 Angola, Burundi, Democratic Republic of Congo, Cameroon, Central African Republic, Rwanda, and Togo.14 Cameroon and Togo; Brazil, Costa Rica, the Dominican Republic, Ecuador, and Panama.15 Cyprus, Mexico, the Philippines, and Uganda.



TABLE 16. LESS DEVELOPED COUNTRIES IN ASIA: CHANGES IN EXPORTS AND IMPORTS, 1960-67

(Value of exports and imports and changes in trade balances in millions of U.S. dollars)

Changes in TradePercentage Changes in Imports Balance *

Exporters of ManufacturesKoreaChina, Republic ofHong Kong

Total

Other CountriesCambodiaSingaporeThailand 4

IndiaPakistanCeylonMalaysiaPhilippinesIndonesiaBurmaViet-NamOthers 4

Total

Grand Total

cjipui is in19661

250536

1,324

2,110

671,102

6781,606

601357

1,25685767919425

251

7,674

9,784

1960-65

402211

15

8-3

956117

-3

-101

2

4

2 1965-66 1966-67 3

431916

19

-36129

— 514

-132

12-4

-13-29

2

2

5

281815

17

27311

—-3-3

5-6

-35-36

4

-2

3

— iinpuiis in1966 *

716622

1,767

3,105

1111,328

8842,822

900426

1,104957583158496613

10,381

13,487

1960-65 2

6139

9

1— 1

115

10-6

464

— 197

4

5

1965-66

551213

20

87

203

-143717

— 19-36

3420

2

6

1966-67 3

3926

3

15

-138

13422

-15-22220

-1091

6

8

1965-66

-17820

-17

-175

-4637

-9210

216-168

1226

10659

-136-97

-73

-248

1966-67 *

-210— 67

152

-125

32— 70

-108112

-19857

-23-260-155

— 52-52

I

-716

-841

Sources: International Monetary Fund, International Financial Statistics, and staff estimates. Countries within each group are ranked indescending order of export expansion 1966-67.

1 Derived from customs data, exports f.o.b., imports c.i.f.2 Percentage increases from 1960 to 1965 expressed as compound annual rates.8 Includes certain preliminary data.* Data include staff estimates.

prices for rubber and wool and of reduced sup-plies of cotton not reflected in a commensuraterise in prices (Chart 23). The prices of mostcoffees declined in 1967, reducing the value ofcoffee exports by 6 per cent, whereas sharplyhigher cocoa prices led to an increase of 27 percent in the value of exports, which more thanmade good the declines experienced in 1965 and1966. Among the nonferrous metals there waslittle or no change in the value of exports oftin and copper between 1966 and 1967.

The seven commodities listed in the tableaccount for about one fifth of the total exportsof primary producing countries outside Europe,for more than one fourth of the value of theirexports excluding petroleum, and for well overone half of the exports of large regions in LatinAmerica, Africa, Southeast Asia, and the MiddleEast.4 The table provides an indication of the

4 Among the countries whose exports consist pre-dominantly of some of these commodities are Bolivia,Brazil, Chile, and Colombia in South America; Ghana,Ivory Coast, the Democratic Republic of Congo, Zambia,East Africa generally, and many of the smaller tropicalcountries in Africa; Malaysia, the United Arab Republic,the Syrian Arab Republic, and the Sudan. Almost onehalf of the exports of the Central American and Carib-bean countries and of Indonesia also consist of thesecommodities.

sharp year-to-year fluctuations in export receiptsto which many primary producing countriesheavily dependent on one or two commodities areexposed.

Less Developed Countries

Trade and Output

Most of the Asian countries experienced stag-nation or declines in export receipts in 1967(Table 16). These were associated with adverseagricultural conditions in 1966 and the earlymonths of 1967 in the Indian subcontinent, Indo-nesia, and the Philippines, and with declines inthe prices for some of the major exports of theregion, notably rubber, tea, tin, and fibers. How-ever, for countries in and around the Indian sub-continent the recent improvement in the agri-cultural situation has led to a resumption ofeconomic expansion and to a recovery of exportearnings. In India, agricultural production hasincreased sharply, and a recovery in the indus-trial sector is foreseen as the food situationimproves, imports of grains are cut back, and

Value of Percentage change in Exports Value of



higher imports of raw materials and componentsbecome possible. It is now estimated that theimproved situation has already led to an increaseof 10 per cent or more in total national outputin the fiscal year ended in March 1968, comparedwith 3 per cent in the previous fiscal year. InPakistan, poor crops kept the increase of realgross national product (GNP) down to 4.5 percent per annum in 1966 and 1967. Crops werereduced by storms and drought, necessitating sub-stantially larger food imports during 1967, and,at the same time, the earlier rapid expansion ofPakistan's exports was checked by several factorsin 1967: the slowdown of economic activity inEurope led to a marked decline in the value ofPakistan's exports to the European EconomicCommunity; the growth of exports of manu-factures to African countries was not maintained;and exports to Indonesia were reduced by changesin that country's trading policy. In Burma bothoutput and exports were reduced in 1966 and in1967 by highly unfavorable crop conditions andby the organizational problems encountered in thecourse of establishing a socialist system. Thebetter rice harvest expected in 1968 should bringa recovery of growth. In Ceylon exports declinedfurther in 1967, but there was some improvementin the domestic economic situation.

In Southeast Asia, Malaysia's export receipts in1967 were reduced by declines in tin and rubberprices, and investment was curtailed because ofthe need to cut back imports. The growth of grossdomestic production in 1967 fell to some 3 percent, continuing the slowdown which had beenunder way since 1965. In Cambodia exportsrecovered from the low 1966 level as a result ofstrong demand and high prices for rice. In Thai-land, however, the drought during 1967 reducedthe 1967/68 rice crop and resulted in slowergrowth of exports and of gross domestic productin 1967 than in 1966. Imports of both capitalequipment and consumer goods showed furtherincreases. In Indonesia, rice production improvedin 1967 but the output of agricultural commoditiesand minerals for export generally declined. Apartfrom a revival of textile production, a low level ofactivity still prevailed in the industrial sector.The rate of inflation slowed down during 1967 asa considerable expansion of imports was madepossible by increased foreign aid and lending. In

the Philippines, exports were reduced by a sharpfall in copra production, but GNP is estimated tohave increased by about 5 per cent from 1966to 1967, mainly as a result of a larger ricecrop and increased activity in construction.

In contrast to developments elsewhere in Asia,a high rate of economic growth was maintainedin the Republic of China and in Korea, GNP risingby 9 per cent and 8 per cent, respectively, against8 per cent and 13 per cent from 1965 to 1966.Investment in manufacturing continued to risein both countries and the production and exportof manufactures increased rapidly. A severedrought affected the growth rate in Korea, butthe rise in prices was restrained by the rapidincrease in imports that resulted partly from anaccelerated policy of import liberalization.

A number of adverse circumstances affected theproduction and trade of African countries during1967, and it seems probable that there was littlechange in the aggregate output of the region from1966. Among the unfavorable developments werethe civil war in Nigeria; the continued disloca-tion of established trading and supply patterns asa result of Rhodesia's unilateral declaration ofindependence; difficulties for the trade of someEast African countries when the Suez Canal wasclosed; and the effects of poor harvests in anumber of northern countries in 1966 and 1967.These difficulties were compounded by the unfa-vorable demand situation for many of the region'sprimary products occasioned by the slower growthof output in industrial Europe. Stagnant or fallingexports compelled a number of countries to holddown the level of economic activity and to curbthe growth of imports (Table 17).

Ghana's exports recovered from their abnor-mally low level in 1966. Although the reportedcocoa crop was the smallest in seven years, otheragricultural output increased by about 8 per centin 1967 and GNP is estimated to have risen by3 per cent, after having changed little in thetwo preceding years. Economic conditions alsotended to improve in 1967 in the equatorial Afri-can countries. Agricultural conditions were gen-erally good and the value of exports from Gabon,Chad, and Congo (Brazzaville) increased sharply.Nigeria's exports rose sharply in the first half of1967 but were then curtailed by the outbreak of



civil war. Business confidence weakened, invest-ment spending was cut back, and aggregate out-put barely increased from 1966 to 1967, followinga 2* per cent rise in 1966 and an average growthrate of 5 per cent in preceding years. In Mali andSierra Leone, economic activity was curbed asthe weakness of exports intensified the need toredress the fiscal and payments imbalances asso-

ciated with the heavy development outlays ofrecent years.

In East Africa the principal coffee exporters—Ethiopia, Kenya, Tanzania, and Uganda—experi-enced declines in the value of their coffee exportsand of total exports. There was also a markedfall in the value of cotton exports from the area,but in the Sudan such exports increased consider-

TABLE 17. LESS DEVELOPED COUNTRIES IN AFRICA AND THE MIDDLE EAST: CHANGES IN EXPORTS AND IMPORTS, 1960-67


AfricaPetroleum exporters

LibyaAlgeria 5

Total

Other CountriesGhanaEquatorial Africa °Mozambique B

AngolaMalagasy RepublicTunisiaLiberia sSudanIvory CoastOther West Africa 5- 7

MoroccoUgandaKenyaRhodesia B

Zambia 5

TanzaniaCameroonSenegal 5

EthiopiaNigeriaSierra LeoneOthers G

Total

Total, Africa

Middle EastExporter of manufactures

IsraelExporters of petroleum

IranSaudi Arabia 5

Kuwait 5Iraq sOthers 5- 9

Value ofExportsin 19661

995622

1,617

244193112221

9814015020331114142818817427469123513114911179383

899

5,969

7,586

503

1,3091,6401,304

9391,065

Percentage

1960-65 2

4

3

20

178

104

101

13

"485

834I 8

91015s

6

9

15

911568

Changes

1965-66

25-2

13

-16-5

4106

17114

1211

—520

-3830341016

-46

-617

6

7

17

—1857

15

in Exports

1966-67 3

1812

16

161510866654

— 1— 1-2— 4— 4-5-6— 7— 8— 9

-14— 16

5

-1

3

11

4791

— 172

Value of- Imports

in 1966 *

405639

1,044

352203208207140250114222258176477120314267388180131161162718100951

6,099

7,143

833

930570463493645

Percentage Changes

1960-65 2

14-8

-5

45694593

15

"295

61028

1258

I I 8

7

4

11

7»14928

1965-66

26— 5

5

-219

20612

1079

— 165

26-29

1729

— 2— 2

8— 7— 7

6

2

2

—8

14239

— 1

in Imports

1966-67 3

1810

12

— 915

— 43344

10-10

—28

— 3-5

1024

135

— 1-12-13— 10

10

4

5

-9

214

28— 15

1

Changes in TradeBalance *

1965-66

11318

131

49— 28-31

94

165

— 61215

— 283

-36-57103

191524

— 1796

375

245

376

72

-64182

— 2515

148

1966-67 3

11217

129

72— 2

19— 51

1-2— 3

3314

-5-40

—8-40

-131— 15-55-10

9— 21

— 3-48

-270

-141

133

424160

-119-86

15

Total 6,257 10 3,101 256 394

Other CountriesJordanUnited Arab RepublicSyrian Arab RepublicLebanon 5

Others

Total

Total, Middle East

3460517310397

1,012

7,772

2117

156

4

8

21

22014

4

9

-6— 6

— 10-13

2

-7

8

1911,070

289533188

2,271

6,205

67

-297

6

88

221534106

15

10

-20— 26

— 9— 10

4

-17

— 5

— 28— 136-70-31

2

-263

65

36243

740-6

320

847


1 Derived from customs data, exports f.o.b., imports c.i.f.2 Percentage increases from 1960 to 1965 expressed as compound annual rates.8 Includes certain preliminary data.* Exports increased from $11 million in 1960 to $797 million in 1965.6 Data include staff estimates.6Equatorial Africa comprises Chad, Congo (Brazzaville), Gabon, and Central African Republic.7 Dahomey, Mali, Mauritania, Niger, and Upper Volta.* 1961-65.9 Aden (South Yemen), Bahrain, Muscat and Oman, Trucial States, and Qatar.

8 9 10 8* 9 5



ably both because the authorities adopted a flexiblemarket policy and because reduced production inthe United Arab Republic tended to strengthenthe price of long-staple cotton. Economic growthappears to have slowed in 1967 in most of theEast African countries.

The rate of economic growth in Zambia accel-erated from the low pace of 1966, when eventsfollowing Rhodesia's unilateral declaration ofindependence had severely disrupted the Zambianeconomy. Output continued to expand in theDemocratic Republic of Congo despite the strifethat affected certain regions in the second half of1967. Conditions in most North African countriestended to improve during 1967. Petroleum exportsfrom Libya continued to rise, although less rapidlythan in 1966. The economy of Tunisia, whichin 1966 suffered a setback as a result of poorcrops, appears to have improved in 1967. Droughtconditions prevailed in Morocco in 1966 and1967, but improved weather conditions shouldlead to an economic recovery during 1968.

Hostilities in the area and the closing of theSuez Canal had a severe impact on many of theMiddle East economies. With the exception ofIran, whose exports increased sharply in conse-quence of very high petroleum sales in the secondhalf of 1967 when the Arab countries imposedan embargo on oil shipments to certain industrialcountries, the exports of all the oil-producingcountries rose much less rapidly than in theprevious year, or declined. Iraq's petroleum exportshad been reduced earlier in the year by thestoppage of pipeline shipments through the SyrianArab Republic, and the total value of Iraq'sexports declined by 17 per cent from 1966 to1967. In most of the countries not producingpetroleum, exports declined from 1966 to 1967,and only Israel achieved a substantial increase.

The United Arab Republic and Jordan sufferedparticularly severely from the hostilities. Thebalance of payments and financial problems thatthe United Arab Republic had encountered inearlier years were greatly aggravated by the lossof revenues from the Suez Canal and lower touristreceipts, by the loss of the Sinai oilfield anddamage to the Suez refinery, and by other costs ofthe war. While agricultural production increasedsomewhat despite the reduced output of cotton,industrial production and imports were held down

by restrictive policies, and the growth of total out-put appears to have slowed markedly. In Jordanthe occupation of the West Bank of the JordanRiver by Israel greatly reduced the country's pro-duction and exports of agricultural commodities,and eliminated the major source of tourist earnings.Economic activity on the East Bank slackened asa result of the general dislocation and uncertainty.The Syrian Arab Republic, which experienced areduction of cotton output in 1966, had poorcereal crops in the 1966/67 season, and itsexports in 1967 were further depressed when theclosing of the Suez Canal blocked cotton ship-ments to Asian markets. Like the United ArabRepublic and Jordan, the Syrian Arab Republicreceived special foreign exchange assistance fromKuwait, Saudi Arabia, and Libya.

In contrast to the situation in most Middle Eastcountries, rapid economic growth was maintainedin Iran during 1967. Successive good harvestsof food crops during the years 1965-67 andunusually high oil revenues in 1967 have sup-ported a substantial program of economic andsocial development. In Israel, where industrialactivity had been growing slowly and considerableunemployment had prevailed at the outbreak ofhostilities, the rate of economic expansionincreased in the latter part of the year. Israel'sexports, which consist largely of processed andmanufactured goods, were scarcely affected by theweakness of commodity prices and their valueagain rose substantially in 1967, although by lessthan in earlier years.

In the Western Hemisphere, growth of outputin 1967 is believed to have been somewhat higherthan the 4*A per cent increase estimated for1966, principally because of substantial gains inagricultural output in Argentina and Brazil fol-lowing declines in 1966. Manufacturing produc-tion in the region rose less rapidly than in 1966but mining output accelerated and total investmentappears to have been well maintained.

Few of the larger countries in the WesternHemisphere increased the value of their exportsin 1967 (Table 18). Venezuela's exports increasedas a result of the demand for its petroleum duringthe Middle East crisis, and the rise in Bolivia'sexports also reflected a substantial increase in salesof petroleum. The exports of the other countrieswith substantial trade in minerals (Chile and Peru)



remained at roughly the high 1966 levels as a con-sequence of the continued rise in the value of theirexports of tin and copper. In Ecuador exportsincreased further, largely on the basis of higheragricultural production and more effective exploita-tion of foreign markets. In Paraguay a slight risein exports following a decline in 1966 was asso-ciated with the recovery in agricultural output.

Brazil, Mexico, Argentina, and Uruguay experi-enced moderate to severe declines in export reve-nue from 1966 to 1967, while Colombia's exportearnings were almost unchanged. Brazil andColombia were affected by the lower prices forcoffee, and Brazil's exports were further reducedby a fall in the volume of cotton exports. Cottonproduction in Mexico was seriously affected byweather conditions, and the value of its cottonexports fell by about 35 per cent (Table 15).The volume of Argentina's agricultural exportsdeclined from the high level of 1966 becauseof a sharp reduction in exports of wheat, whileUruguay's livestock products were restricted by

the heavy slaughterings during the 1964-65drought and by frost and floods during 1967.In addition, the value of wool exports from bothcountries fell sharply, and both were affectedtoward the end of 1967 by the U.K. embargoon meat imports from countries where foot andmouth disease was endemic.

Growth of output in 1967 increased in Vene-zuela to about 6 per cent, and there was also aresumption of growth in Argentina. In Argentina,where a comprehensive program of domestic stabi-lization and trade liberalization was instituted earlyin 1967, manufacturing production was slightlylower than in 1966 but, as a result of morefavorable conditions in the agricultural sector, totaloutput increased by about 2.5 per cent in 1967after declining by 1 per cent in the previous year.Prices rose somewhat less in 1967 as a wholethan in 1966, with a substantial reduction in therate of price increase occurring in the last quarterof 1967 and during the first quarter of 1968.A sharp rise in agricultural production was also

TABLE 18. LESS DEVELOPED COUNTRIES IN THE WESTERN HEMISPHERE: CHANGES IN EXPORTS AND IMPORTS, 1960-67


Petroleum ExportersSurinam 4

Netherlands Antilles *Venezuela 4

Trinidad and Tobago

Total

Other CountriesDominican RepublicBolivia 4

Ecuador 4

El SalvadorNicaraguaHondurasPanamaParaguayGuyanaPeruChile 4

JamaicaColombiaCosta RicaMexicoBrazilArgentinaGuatemala 4

MartiniqueUruguayOthers 4

Total

Grand Total

Value ofExportsin 1966 i

92592

2,713429

3,826

1371261851921381438949

109763877228510136

1,2281,7411,593

22845

186329

9,032

12,858

Percentage Changes

1960-65 2

6227

2

— 5174

1021152416597636957

10489

7

5

1965-66

56-2— 1

6

—

915424

1313

-141215287

-521797

2218

-39

9

6

in Exports

1966-67 3

9862

6

1411886622211

—— 1

4-5-8

-12-13-15

1

-2

—

Value ofImports

in 1966 *

90745

1,331454

2,620

185138147220182149253

58118817755327674178

1,6051,4961,124

20793

164769

9,659

12,279

Percentage Changes

1960-65 2

12-2

410

3

—136

1017111264

1436

10126

-3— 1

1014

-59

3

3

1965-66

-5—-8

4

— 5

8510

— 49

142213121314251348—3

37-6

-1029

13

14

9

in Imports

1966-67 a

111110

-10

7

4122

12137

1611217

-2689

11-3

161437

4

4

Changes in TradeBalance l

1965-66

38— 10

9243

163

-744

13-16-28— 11

-19— 14-2-141

-24— 247

2437

— 254175635

— 19-62

-409

-246

1966-67 3

-2-37

2856

45

13121211

-14— 11

-16— 8

-1158

-23177

— 15— 199-258— 101-61-19-32— 48

-588

-543


1 Derived from customs data, exports f.o.b., imports c.i.f.2 Percentage increases from 1960 to 1965 expressed as compound annual rates.* Includes certain preliminary data.4 Data include staff estimates.



the main factor sustaining growth in Brazil. Totaloutput is provisionally estimated to have risenby 5 per cent (compared with about 4.5 per centfrom 1965 to 1966), and the rate of increase inprices declined considerably. Despite a sharprecovery in industrial production during the year,industrial output in 1967 was only 2 per centhigher than in 1966. The Mexican economy con-tinued to expand in 1967, at a rate of about6.5 per cent. Although agricultural productionwas reduced by unfavorable weather conditionsand exports were lower than in 1966, Mexico'sexternal position was supported by higher receiptsfrom tourism and a substantial net inflow of pri-vate capital. There was a marked increase inpublic sector capital spending, and consequentlyimports of capital goods rose.

The year 1967 was one of reduced growth formost of the countries on the west coast of SouthAmerica. In Peru, GNP rose by slightly over4 per cent in real terms, somewhat less thanin 1966, because of poor crop performance andfinancial uncertainties culminating in the Septem-ber depreciation of the sol. Production of manu-factured goods and fish meal rose strongly, thelatter contributing to the continued decline ofworld fish-meal prices, but construction activity—a major expansionary force in previous years—slackened considerably. Growth of mining outputwas again sluggish, reflecting the full utilization ofexisting capacity and the continued absence ofmajor new investments. In Colombia agriculturaloutput rose by somewhat more than 4 per cent,and increasing supplies of staple foods, togetherwith improved financial policies, helped to limitthe upward movement of the cost of living andwages. There was, however, a sharp contractionin imports (following an increase of almost 50 percent in 1966), and the output of the manufac-turing, mining, and construction industries rosecomparatively little. In Chile exports werealmost unchanged from 1966 to 1967, followingan increase of 28 per cent in 1966. Agriculturaland manufacturing output rose considerably lessthan in 1966, and imports of raw materialsand consumer goods remained about the sameas in the preceding year. Sustained growth ofthe Bolivian economy at about the same 6 percent rate as in 1966 was largely induced by therapid growth of petroleum production. There

was also an increase in construction activity, butoutput in the mining sector expanded less than in1966.

With the exception of Panama, where the grossdomestic product rose by 8 per cent, and ofCosta Rica, where output rose somewhat less,the countries of Central America and the Carib-bean experienced slower growth than in previousyears, largely as a consequence of poor agricul-tural output. In El Salvador, Guatemala, Hon-duras, and Nicaragua, crop production, especiallyof cotton, was reduced by drought but industrialproduction continued to expand under the stimulusof rapidly growing intraregional trade in theCentral American Common Market. In theDominican Republic output had recovered in1966 following the sharp drop associated withpolitical developments in the previous year; therewas a further increase in output in 1967.

Balance of Payments Developments

The broad lines of balance of payments develop-ments in less developed countries are describedin Chapter 4. Taking the group as a whole, thedeficit on current account widened from 1966to 1967 by about $1.5 billion, but an increase ofalmost $2 billion in the recorded capital inflowled to an increase of $0.5 billion in the over-allsurplus5 (Table 19). Receipts of official capitaland aid rose substantially from 1966 to 1967.Most of the increase resulted from the recovery ofaid flows to India, Pakistan, and Indonesia. Theseincluded substantial aid-financed food shipments.There was a small increase from 1966 to 1967in the inflow of private long-term capital resultingfrom higher flows to a limited number of coun-tries in Latin America and East Asia. About onehalf of the net increase in capital inflows was inshort-term forms, and much of this reflected officialborrowing by countries in balance of paymentsdifficulties. Most of the Middle East countriesincreased their reserves in 1967, but elsewherethe increase in reserves was concentrated in alimited number of countries and the majorityexperienced some weakening in their externalpositions.

r> Detailed balance of payments statements for the coun-tries included in these totals are given in SupplementaryNote B, Table 46. For definition of the over-all balance,see footnote 2, Table 19.



In many cases the pressure on countries' pay-ments balances was attributable to the unsatis-factory performance of their exports, and during1967 and early 1968 there was a marked increasein the use made of the Fund's facility for com-pensatory financing of export fluctuations. Detailsof the drawings are included in SupplementaryNote A in a brief discussion of experience withthe compensatory financing facility.

In most of the countries producing petroleumin the Middle East, the increases in exportreceipts from 1966 to 1967—despite the oil

embargo—together with some declines in imports,tended to improve the trade balances and over-allpayments positions. In Iraq, however, petroleumexports had been interrupted prior to the hostilitiesin the area in consequence of the pipeline disputewith the Syrian Arab Republic, and the over-allsurplus in the balance of payments declinedsharply. Israel's over-all position was improved bya substantial increase in exports and large transfersof funds from other countries. Among the othercountries not producing petroleum, the improve-ments in over-all balances were caused not by

TABLE 19. LESS DEVELOPED PRIMARY PRODUCING COUNTRIES:SUMMARY OF CURRENT, CAPITAL, AND OVER-ALL BALANCES, 1965-67 *


Balance on Goods, Services,and Private Transfers Capital Balance

1965

Total

AfricaGhanaNigeriaLibyaOthers

Total

AsiaIndiaPakistanIndonesiaPhilippinesChina, Republic ofKoreaOthers

Total

_498 -530 -280

-226-277

87-306

-148-283101

-360

-84-240

180-442

828

246276

-13364

662

97260-7414

732

56153

-104431

-722 -690 -586 873 764 536

-1,335-588-247

111-81

-126-357

-969-404-123

136-8

-225-409

-1,158-669-289-102-97

-330-651

1,305527299-3584135458

909382112

-13245324724

1,13664328087176441769

-2,623 -2,002 -3,296 2,773 2,364 3,532

Over-All Balance 2

19655

330

20-17458

151

150

19666 1967

Middle EastIsraelJordanIranUnited Arab RepublicOthers

-214-68-99

-252135

-155-92

-137-176

30

94-74-84

-26953

313131137235

12

13311915616787

9176148282117

996338

-17147

-222719

-9117

1031026413

170

132

-51-23

9454

74

362

452

-28-87

76-11

-50

-30-61527639

101

-60-22

1143799293

-22-26

9-1579111100

236

Western HemisphereArgentinaVenezuelaPeruChileBrazilColombiaMexicoOthers

Total

Grand Total

220-29

-159-39247

-20-397-366

-543

-4,386

257-45

-165-68-67

-290-367-413

-1,158

-4,380

187-32

-247-158-331-64

-463-530

-1,638

-5,800

-9315

17489

-1450

351403

975

5,449

-2314

14511516

282395412

1,138

4,928

35412721912815736

485500

2,006

6,806

127— 14

1550

23330

-4637

432

1,063

26—41-20

47-51-828-1

-20

548

54195

-28-30

-174-28

22-30

368

1,0066

Sources: Data reported to the International Monetary Fund and staff estimates.1 For coverage see Table 46.2 Over-all balance measures the balance financed by changes in official gold and foreign exchange assets and in net Fund

position. Figures for 1967 have been adjusted to exclude estimated losses arising from the devaluation of sterling.

1966 1967 1965 1966 1967



increases in export receipts but by sharp cutbacksin imports, as well as the provision of considerablesums of foreign exchange support to the UnitedArab Republic, the Syrian Arab Republic, andJordan from the oil-producing Arab countries.

Major countries in Africa other than Libyaand the Democratic Republic of Congo did notgain reserves during 1967. Ghana and Tunisia,however, reduced both their current account andover-all deficits through increases in currentreceipts and, in Ghana, a continued reduction inimports. The Sudan's payments position did notimprove for the year as a whole despite someimprovement in the current balance. Among othermajor countries, Nigeria incurred a large pay-ments deficit from a continued decline in capitalreceipts generally as a result of domestic insta-bility, while Ethiopia also sustained a deteriora-tion in the over-all balance because of a reducedinflow of long-term capital and aid.

In the Far East, Korea and the Republic ofChina continued to strengthen their reserve posi-tions through increased current and capitalreceipts while at the same time they had a higherlevel of imports. In India exports were littlechanged from 1966 to 1967, while they declinedmoderately in Ceylon and Malaysia. Each coun-try's imports were lower than in 1966, with aparticularly large drop in Ceylon, and their over-allbalances improved somewhat. India's externalposition was supported by an increase in theflow of capital and aid; the same was true ofPakistan and Indonesia, in both of which aid-financed shipments of food contributed much ofthe increase in imports. In the Philippines, importsalso rose despite the weakness of exports, and theover-all balance was maintained close to the1966 level by a substantial increase in officialborrowing.

In the primary producing countries of the West-ern Hemisphere, the surplus position of the regionas a whole stemmed principally from developmentsin Argentina and Venezuela. The large increasein Argentina's gross reserve position from 1966to 1967 reflected official borrowings and a sub-stantial inflow of private capital after the majordepreciation of the exchange rate in the early partof the year. The improvement in Venezuela's over-all balance occurred when the flight of capitalwhich started in the third quarter of 1966 wasreversed in 1967, and that country's position

benefited further from the gain in export receiptsresulting from the Middle East crisis. In Mexicothe trade balance deteriorated but higher touristreceipts and private capital inflows led to a smallover-all surplus. Colombia's trade balanceimproved sharply as a result of a sizable reductionin imports, and, although the over-all balance waslittle changed from 1966, commercial paymentsarrears and other short-term liabilities were muchreduced. Peru also recorded little change in itsover-all deficit from 1966 to 1967, but in this casethere was a large increase in the current accountdeficit and the over-all position was only main-tained by a substantial rise in short-term liabilities.In Brazil and Chile both the current accountand the over-all balances deteriorated from 1966to 1967, although in early 1968 there was somestrengthening in the over-all balance of Chile anda pronounced improvement in that of Brazil.Most of the Central American countries alsoexperienced deteriorations in their current andover-all balances.

Some Recent Policy Developments

This section discusses the recent experience ofa number of less developed countries in whichdifficult problems of economic policy managementhave been encountered. Although the circum-stances of these countries are diverse, their diffi-culties have in general been associated with aWeakening of external positions reflecting suchfactors as severe pressures on the budget andon resources, arising from expenditure programs;the effects of bad weather and political distur-bances on production; and developments in themarkets for principal export commodities.

Many less developed countries are subject tofluctuations in export earnings resulting fromsharp changes in supply or demand conditionsfor the limited number of export commoditieson which they depend. Such fluctuations affectthe capacity to import and the pace of economicdevelopment, and changes in capital flows mayaccentuate the problem. In contrast to the situa-tion in most less developed countries, oil export-ers normally run trade surpluses and are freedfrom severe balance of payments constraints bythe possession of ample foreign exchange reserves.There are also a few less developed countriesthat have succeeded in developing specializedagricultural and manufactured exports in strong



demand, and have been able to realize a fairlysteady expansion of export earnings. Where thishas been coupled with appropriate domestic poli-cies and with a satisfactory flow of capital andaid, countries have been able to sustain the growthof imports needed for development and to achievefairly continuous economic growth while graduallyrelaxing their restrictions.

Most less developed countries experiencingfluctuations in the external sector and not possess-ing substantial foreign exchange reserves haveencountered severe strains because of difficultiesin making timely adjustments of economic policiesto meet rapidly shifting circumstances, includingthe length of the period before new policy meas-ures become fully effective. In times of strongdemand for their exports, primary producingcountries find their domestic economies bolsteredby high export incomes, their balance of paymentsimproved further by the effects on capital flowsof growing confidence at home and abroad, andtheir fiscal positions strengthened by higher taxrevenues. As the upsurge of export receipts con-tinues, governments may tend to relax theirrestrictions, to ease their domestic policies, and tostep up their development efforts. In so doing,they may encourage economic expansion at apace that cannot be maintained, particularly ifexports falter or decline. As government expendi-tures for infrastructure and social developmentare increased, the import demand for capital goodsand for consumer goods rises rapidly. The increasein government spending and imports, however,tends to follow the rise in export receipts and togain momentum in the optimistic atmospheregenerated by a strong external position. If exportreceipts stagnate or decline, government receiptsare similarly affected while domestic spendingmay not be restrained in time and imports con-tinue at a high or even rising level. At thisjuncture, the governments are often forced toadopt stringent restrictive policies, including reduc-tions in their development expenditures, and onoccasion to reverse the liberalization of their trad-ing systems.

Elements of this cyclical pattern have beenpresent in the recent experience of a numberof less developed countries. In Chile, for instance,the quite unusual and temporary increase in cop-per prices, together with improved fiscal, mone-tary, and exchange rate management, led to aremarkable improvement in the balance of pay-

ments position during 1965-66. This enabled theChilean authorities to implement in 1966 a con-siderable liberalization of imports—by shorteningthe compulsory deferment period for import pay-ments and the time lag between the applicationand approval of imports, removing the surchargeson certain machinery imports, and simplifyingadministrative procedures. Accordingly, importsrose sharply during 1966. In the meantime, asizable increase in tax revenues, resulting fromthe combination of higher trade and internaleconomic activity and a substantial tax reform,encouraged the Government to expand consider-ably its expenditures on development projects—including economic infrastructure, school andlow-cost housing construction, large-scale agri-cultural resettlement programs, and increasedsocial security outlays as part of an income redis-tribution policy in favor of the lower-incomeclasses. However, the lack of restraint of domesticdemand, the leveling off of average copper pricesfrom 1966 to 1967, an increase in transfers offunds abroad by the copper companies, and areduction in external aid brought a sharp deteri-oration in Chile's payments position during 1967.The larger domestic financing of the public sec-tor deficit—despite a slowdown in investmentexpenditures of the Central Government—led toan accelerated rate of credit expansion. The rateof inflation, which had steadily decelerated from1964 onward, increased again during 1967, andthe authorities found it difficult to limit wage andprice adjustments. The exchange rate was depre-ciated in line with the rising domestic price level,and the authorities are tightening the managementof fiscal and credit policies during 1968 in orderto restrain inflation and to strengthen the externalposition.

In Peru, rising public sector investment,particularly for social capital, accompanied by asharp expansion in current outlays, led to verysubstantial increases in the budget deficit from1964 onward, and to higher imports. Althoughthe external position was bolstered by a sizableincrease in export earnings from 1963 to 1966,associated with unusually favorable conditions forfish-meal products and copper, there were recur-rent pressures on the foreign exchange reserves.Beginning in 1966, capital outflows built up atan increasing pace. In 1967 there was a sharpincrease in reliance on the monetary authoritiesfor deficit financing. The external situation was



aggravated by a leveling out of the value ofexports from 1966 to 1967, following the 15 percent increase in 1966. In September 1967 theauthorities decided to retire from the exchangemarket and to allow the sol to fluctuate freely.In October they reintroduced on a temporary basisa system of exchange certificates similar to thatin effect prior to 1960 and the Central ReserveBank re-entered the exchange market. Withreserve losses continuing, the Government inFebruary 1968 prohibited imports of a largenumber of "nonessential" consumer goods for aperiod of 90 days. There was a further deteriora-tion in the fiscal situation in the ensuing months.

In June 1968, however, the Government wasgranted special powers by Congress for a periodof 60 days to deal by decree with Peru's financialdifficulties. On the strength of this enabling legis-lation, the Government promptly introduced apackage of fiscal measures including important taxincreases and new taxes, as well as substantialexpenditure cuts. At the same time, a temporarysurcharge was imposed on a wide range of imports.These measures are expected to reduce substan-tially the budget deficit and to alleviate the balanceof payments pressures.

Sharp declines in commodity prices pose severeproblems for smaller countries that have deliber-ately encouraged production for export by sup-porting the prices paid to producers, in theknowledge that their production will not be largeenough to affect world market prices. Marketingboards in these countries are apt to incur heavylosses in times of prolonged price declines. InUganda the prices paid to producers of coffee andcotton in 1965 and 1966 were higher thanrealized export prices, and the excess was financedfirst by drawing on the price assistance funds andthen by government borrowing. At the same time,a sizable increase in capital expenditures had beeninitiated in the previous years of rapidly risingexport receipts and high government revenues.These developments led to severe strains and lossesof foreign reserves during the 1965/66 fiscal year.Accordingly, capital spending was slowed downand procurement prices were reduced by one thirdfor coffee in May 1965 and for cotton at thebeginning of the 1966/67 season. In Sierra Leonethe Produce Marketing Board also encounteredserious financial difficulties in 1966 owing to over-expansion in plantation and processing activities.

Coupled with a sharp increase of capital expendi-ture in 1965/66, this situation led to rapiddeterioration in the fiscal and payments positionsand the Fund approved a stand-by arrangementto support a program of stabilization measures. InJune 1967 the authorities announced the liquida-tion of uneconomic plantations as well as thereduction by 17 to 28 per cent of procurementprices for palm kernels, cocoa, and coffee. Thereduction in procurement prices, however, led tolower recorded exports of farm produce as moreof them went to Liberia to take advantage ofhigher prices. In November and again in Decem-ber, following the devaluation of the leone, pro-curement prices were raised. Similar upwardadjustment of procurement prices also took placein Ghana during the 1966/67 and 1967/68seasons, sizable unrecorded exports of cocoa intoTogo and Ivory Coast having occurred after thesharp reduction of cocoa prices in 1965/66.

In contrast to the smaller less developed coun-tries, larger ones can depend on a substantial andgrowing domestic market to support economicexpansion. Some of these countries have a consid-erably more developed industrial base than themajority of less developed countries. However, thediversification of their exports lags well behindthat of their production, despite notable progressin some countries in promoting a widening rangeof exports. Their export receipts are subject toconsiderable fluctuation as a result of changes inthe circumstances affecting their principal com-modities, and these fluctuations can add to thedifficulties of economic management.

About mid-1964 the Brazilian authoritiesinitiated a broad program of policies to reducethe rate of inflation and to lay the basis for stableeconomic growth. In the two following yearsconsiderable progress was achieved in improvingthe fiscal and monetary positions. A sharp dropin food production contributed to continued rapidprice increases in 1966, but in the course of 1967the rate of inflation slowed down markedly.Brazil's net foreign reserve position improvedsharply in 1965 and there was a further, althoughmore moderate, gain in 1966. Exports rosestrongly in both 1965 and 1966, the recovery ofcoffee exports being an important factor in thelatter part of 1965 and in 1966. Imports declinedin 1965 and then rose steeply in 1966, althoughthe upsurge of imports in 1966 only raised them



to slightly above the level reached in 1963, theprevious peak year. In 1967, the fiscal deficit andrate of jnonetary expansion increased, partly asa result of policies adopted to counter the down-turn in industrial activity that began late in 1966and deepened in the first quarter of 1967.

Despite the introduction of liberalization meas-ures in March 1967, imports rose at a muchslower rate than in 1966; much of the increase wasin imports of capital goods. Exports fell, mainlybecause of the reduction in coffee prices. Brazil'sdependence on coffee for its foreign exchangeearnings has been reduced substantially in recentyears, but coffee exports still account for approxi-mately 45 per cent of total export receipts. Asthe gross and net foreign reserve positions wors-ened during 1967, steps were taken in Augustand September to restrain the outflow of capital.However, following the depreciation of January1968, and a sharp fall in the fiscal deficit, therewas a substantial reflux of capital that led to astrong recovery of the foreign exchange reserveposition. In early 1968 both exports and importswere well above their levels in the same period of1967.

The difficulties which India has encountered inrecent years were greatly heightened by thesevere drought which lasted into 1967, andalso by the weakness of export markets in thatyear. Exports, although still lower than in 1965,showed a modest recovery compared with 1966.This occurred in the context of the drought andof the inadequate growth of many of India's non-agricultural exports, notwithstanding some notableexceptions. The effects of the export incentiveprovided by the major devaluation in June 1966were yet to be realized, as the performance ofexports in 1967 was affected by the smallersupply of agricultural raw materials, the weaken-ing of import demand in the key industrial coun-tries, and the closing of the Suez Canal. In thissituation, India was faced with an urgent need toimport foodstuffs and, with a reduction in theinflow of project aid, was obliged to cut back otherimports, including those for important develop-ment purposes. Domestic demand for manufactur-ing output weakened seriously and industrial out-put stagnated.

The attempt to control the rise of nondevelop-ment government expenditures in India and to

reduce deficit financing during the fiscal yearended in March 1968 appears to have been onlymoderately successful, because of higher admin-istrative costs as a result of increases in costof living allowances and the need to providedrought relief and food subsidies; in addition,budget receipts were lower than expected. Theend of the drought has, however, brought renewedstrength to the Indian economy. The Reserve Bankof India reduced Bank Rate from 6 per cent to5 per cent in March 1968 and continues to followa relatively easy policy in order to encourage theproduction and distribution of foodgrains and therevival of industrial activity.

In Pakistan, the balance of payments deteri-orated from late 1966 through the first half of1967 as a result of a sharp increase in importsand a slowing down in the growth of exports.The increase in imports was brought about bythe combination of a substantial increase in grainimports necessitated by two years of crop short-falls and the relaxation of import restrictions.At the same time, the burden of servicing foreigndebt was mounting rapidly and by the middle of1967 the pressures on internal and externalresources prompted the authorities to restrict theexpansion of credit to the private sector and toreverse the liberalization of imports. Deficit financ-ing, which had been very high during the fiscalyear ended in June 1966, was virtually eliminatedduring 1966/67, mainly by reduction of nonde-velopment expenditures. The budget for 1967/68remained restrictive, although development out-lays were increased with an emphasis on food-grain production and export-oriented industries.In the wake of sterling devaluation, the exportbonus scheme, which had grown quite complexsince its institution in January 1959, was simpli-fied; the bonus percentages were raised, and thenumber of effective rates was reduced. At the sametime, export duties on jute and cotton were elimi-nated and a 10 per cent surcharge was placed onmost imports other than certain essentials.

In Indonesia the rate of inflation, as meas-ured by consumer prices in Djakarta, came downto 112 per cent in 1967, compared with annualincreases of about 600 per cent during 1965 and1966. The rise in prices during the second halfof 1967 was higher than in the first half owing tothe worsened food supply situation. With emer-gency rice imports at the end of 1967 and in early



1968 and a good wet season harvest, price pres-sures have eased in recent months. Althoughthe Government was able to exercise a greaterdegree of control over expenditures in 1967, therewas a substantial increase in wage payments andrice allowances. Fiscal receipts derived fromexternal trade increased as a result of changesin the exchange system, the imposition of a sur-charge on import duties, and upward adjustmentsin the import duty valuation rate. However,domestic tax receipts did not increase sufficientlyin 1967 and a sizable fiscal deficit was incurred.Some success was achieved in reducing the rateof monetary expansion, although the growth ofbank credit did accelerate in the fourth quarter of1967 and early 1968. The reform of the foreignexchange system, which was initiated in October1966, was carried further in the course of 1967in that the number of effective rates as well as thespread between them was reduced. The majorityof exchange transactions are effected at freelyfluctuating rates which have depreciated consid-erably. Licensing of exports and permissibleimports was eliminated. In order to encourageforeign investment in Indonesia, the earlier orderto place foreign oil companies under temporarygovernment control was rescinded in 1967, anda number of foreign-owned plantations and enter-prises were returned to their former owners.

The balance of payments difficulties that theUnited Arab Republic had encountered in earlieryears deepened during 1966 and 1967. Whileexports were weak, largely because of the con-tinued decline in cotton output, imports rose sub-stantially from late 1965 through 1966, and theresultant worsening in the balance of paymentssituation compelled the U.A.R. authorities to re-duce sharply the imports of capital goods, rawmaterials, and intermediate goods from the be-ginning of 1967. The situation was further aggra-vated by the outbreak of hostilities, the substantialloss of receipts from the Canal and from touristspending, and the damage and dislocations causedby the conflict. Pressures on the U.A.R. reserveposition were temporarily relieved by foreign ex-change support received from the oil-producingArab states, drawings on the Fund, and the re-scheduling of external debts. The Government hasalso taken further steps to curtail imports and hasadopted a broad program of fiscal and monetaryrestraint. Appropriations for development outlays

in the revised 1967/68 budget were reduced sub-stantially for the second consecutive year, govern-ment allowances to civil servants and subsidies forcertain goods and services were lowered, and taxmeasures were taken, including the imposition ofa surtax on incomes and the upward adjustmentof stamp duties and indirect taxes.

More Developed Primary ProducingCountries

The economic experience of the more devel-oped primary producing countries in 1967 wasrather mixed. In South Africa, where productionin 1966 had been affected by drought conditions,and in Ireland, where the emphasis of economicpolicy shifted toward expansion, the rate of growthwas considerably higher than in the previousyear. The growth of output in Australia was rapid,although affected by the re-emergence of droughtconditions. The economies of most other countriesof this group were less buoyant than in 1966.In New Zealand, Finland, Iceland, and Spain,domestic policy was contractionary, largely inresponse to unfavorable external positions whichhad arisen in part from internal inflationary pres-sures, and which were exacerbated in New Zealandand Iceland by declining exports in 1967. InYugoslavia restrictive policies were continued inorder to facilitate adjustments consequent uponthe economic reform introduced in mid-19 65.

It has been noted that in 1967 the exportexperience of the more developed primary pro-ducing countries was generally more favorablethan that of the less developed countries. Themain exceptions were New Zealand and Iceland,whose foreign earnings were much reduced bythe declines in the value of exports of their princi-pal commodities, wool and fish products, respec-tively. The exports of Yugoslavia and Fin-land rose relatively little in 1967. In the othercountries in the group, the rate of export growthin 1967 was well maintained relative to the aver-age of recent years. Among the factors con-tributing to this relatively good export experiencewere the improved agricultural conditions in anumber of countries; substantial increases insales to Japan, a market of particular importanceto Australia and South Africa; and the fact thatthe exports of many of the more developed pri-



mary producing countries in Europe are welldiversified and include commodities such as spe-cialized foodstuffs, tobacco, and wine for whichdemand was well maintained in 1967.

In Australia fiscal policy was moderatelyexpansionary after mid-1966—the strong growthin defense outlays continued and there were nofurther tax increases—and monetary policyremained easy. Farm income recovered followingthe end of the severe drought; there was a largerincrease in wages and salaries and strongergrowth of private consumption. Real GNP inthe year ended June 1967 was close to 6 per centhigher than in 1965/66, compared with a riseof only \l/2 per cent in the previous year, andthe economy continued to expand relativelystrongly in the second half of 1967 despite thereappearance of drought conditions. Althoughlower world prices for wool prevailed, Australianexports increased rapidly in 1967 mainly becauseof a steep rise in mineral exports to Japan andincreased sales of wheat following the recordcrop in 1966. But imports also climbed asdomestic activity quickened, and the deficit oncurrent account widened. Over 1967 as a whole,a favorable turn-around in the direction of officialcapital flows more than offset some reduction inthe inflow of private funds. However, this declinewas confined to the first half of the year; theinflow of private capital accelerated greatly inthe second half of 1967 and increased even furtherin the first quarter of 1968.

In South Africa more favorable agriculturalconditions in 1967 resulted in a somewhat higherrate of growth. Real gross domestic productincreased by nearly 7 per cent from 1966 to 1967,compared with a rise of 6 per cent in the previousyear. Anti-inflationary policies were pursued in1966 and 1967 and included more stringentmonetary measures, some tax increases, a damp-ening of government outlays, and successiverelaxations of import controls. Domestic expen-diture, which had risen fairly steadily from early1966 until well into 1967, slackened in the latterpart of the year as private consumption taperedoff and stockbuilding slowed. Exports have shownconsiderable strength over the last two years;growth in 1967 was led by certain types ofmanufactures and, in the second half of theyear, by agricultural products. The growth of

imports, which had resumed sharply after therelaxation of restrictions in mid-1966, weakenedby mid-1967, and during the second half of theyear imports declined. Nonetheless, over the yearas a whole imports were appreciably higher andthe trade surplus was halved. The net inflow ofcapital declined moderately from 1966 to 1967,and the over-all payments position changed froma substantial surplus in 1966 to a small deficitin 1967.

In Ireland, partly as a result of restrictivemeasures taken in response to a marked deteriora-tion in the balance of payments, both 1965 and1966 were years of relatively slow growth. How-ever, a faster rate was resumed in 1967, whenreal GNP increased by 4 per cent, more thandouble the gain recorded from 1965 to 1966.The change of policy to an expansionary direc-tion in the latter part of 1966 contributed to morerapid growth, but the rise in demand was led byexports. Exports to the United Kingdom, whichtakes about 70 per cent of Irish exports, rose bynearly 20 per cent from 1966 to 1967. Therewas a substantial increase in shipments of meat,and exports benefited from the termination of theBritish import surcharge in late 1966 and fromthe establishment of a Free Trade Area withthe United Kingdom. Imports to Ireland rosemodestly in relation to the growth of the economy,and there was a further improvement in the cur-rent account position. The net capital inflowinto Ireland had been relatively high in 1966,reflecting heavy official borrowing as well asan increased private capital inflow, but bothcomponents fell off sharply in 1967 and a modestoutflow was recorded. Ireland has particularlyclose trading and financial links with the UnitedKingdom, and the Irish pound was devalued inNovember 1967 in step with the devaluation ofsterling.

In New Zealand a tendency toward conditionsof excess demand had prevailed earlier, but thepace of growth lessened in 1966 and slowedfurther in 1967 in response to restrictive policiesas well as to lower export earnings. Since thelatter part of 1966, there has been a sharp fall inprices for crossbred wool as a result of structuraldeclines in foreign demand (which to some extentreflected increased substitution of synthetic fibers)and of cyclical factors abroad. The New Zealand



TABLE 20. MORE DEVELOPED PRIMARY PRODUCING COUNTRIES: CHANGES IN EXPORTS AND IMPORTS, 1960-67

(Value of exports and imports in millions of U.S. dollars)

Percentage Changes inValue of Exports

Value of AverageExports annual ratein 1966 a 1960-65 2

European CountriesFinlandIcelandIrelandGreecePortugalSpainTurkeyYugoslavia

Total


AustraliaNew ZealandSouth Africa

Total

Grand Total

1,505140680406620

1,254490

1,223

6,318

3,15881,07661,7122

5,946

12,264

8148

101268

14

9

944

6

8

' 1965-66

59

1124

8306

12

13

67

13

8

10

1966-67

3-31

1622101072

7

10-8

14

8

8

Percentage Changes inValue of Imports

Value of AverageImports annual rateH119661 1960-65 2

1,726159

1,04441,32231,02333,574

7251,5676

11,050

3,6361,0952,526

7,257

18,307

99

1110113349

14

76

10

8

11

1965-66

516

811192622

13

-35

-6

-3

6

1966-67

-124

— 3— 1-3-5

8

6-13

17

7

3

Source: International Monetary Fund, International Financial Statistics.1 Derived from customs data, exports f.o.b., imports c.i.f.2 Percentage increases from 1960 to 1965 expressed as compound annual rates.

Wool Commission acquired substantial amountsuntil the floor price to buyers was lowered furtherin October 1967, and in 1967 as a whole thevalue of wool exports declined sharply. Duringthe second half of 1967, however, there wereincreases in the value of exports of meat, timberproducts, and manufactures; moreover, the volumeof wool exports revived somewhat after October.Largely as a result of weaker domestic activity,imports into New Zealand declined from 1966to 1967, more than offsetting the decrease inexports. On a payments basis, however, the tradesurplus deteriorated because a portion of ship-ments of meat and dairy products was addedto unsold stocks held abroad. The New Zealandauthorities again raised funds abroad from privatesources in 1967, and also obtained assistanceby drawing on the Fund both under the com-pensatory financing facility and under a stand-byarrangement. The New Zealand dollar wasdevalued by 19.4 per cent shortly after thedevaluation of sterling.

Economic growth had also slowed down inIceland during 1966, and there was a furtherslackening in 1967 under the impact of weakexports and policies of restraint. Iceland's export

earnings, almost entirely derived from fish prod-ucts, fell by 31 per cent in 1967 as a resultof lower prices and supply difficulties, and usewas made of the Fund's compensatory financingfacility. In November the kronur was devaluedby 24.6 per cent.

In Finland stabilization measures taken to dealwith domestic inflation and a weak external posi-tion contributed to a slow growth of output in1966 and 1967. There was a tapering off ofimports and some improvement in the trade deficitin 1967, despite a further deceleration of exportgrowth. The value of exports of wood, pulp, andpaper, which account for nearly two thirds ofFinnish exports, declined from 1966 to 1967,mainly because of slacker demand conditionsin Germany and other markets. Finland drewon the Fund under its stand-by arrangement dur-ing the year and devalued the markka in Octoberby 23.8 per cent. In April 1968 the Governmentabolished the widespread tying of increases inwages, prices, and financial contracts to priceindices.

The growth of the Spanish economy also sloweddown in 1967, partly in response to the stabiliza-tion measures first introduced in 1966. There



TABLE 21. MORE DEVELOPED PRIMARY PRODUCING COUNTRIES: SUMMARY OF TRADE,SERVICES AND PRIVATE TRANSFERS, AND CURRENT BALANCES, 1965-67


Trade Balance'Balance on Services

and Private Transfers Current Balance


Total



Total

Grand Total

19656

-2324

-424-702-324

-1,759-26

-200

-3,663

-33512022

-193

-3,856

19666

-237-8

-366-727-391

-1,992-145-353

-4,219

103166406

675

-3,544

19677

-179-55

-300-673-356

-1,781-78

-455

-3,877

39127185

351

-3,526

1965

381

295423286

1,27017

235

2,565

-619-256-476

-1,351

1,214

1966

35

285489429

1,42571

301

3,035

-645-288-483

-1,416

1,619

1967

17-1325482490

1,31527

353

3,008

-730-276-482

— 1,488

1,520

1965

-1945

-129-279-38

-489-935

-1,098

-954-136-454

-1,544

-2,642

1966

-202-8

-81-238

38-567-74-52

-1,184

-542-122-77

— 741

-1,925

1967

-162-56

25-191

134— 466-51

-102

-869

-691-149-297

-1,137

-2,006

Sources: Data reported to the International Monetary Fund and staff estimates.1 Derived from payments data, exports f.o.b. less imports partly f.o.b. and partly c.i.f. See Supplementary Note B,

Table 46.

TABLE 22. MORE DEVELOPED PRIMARY PRODUCING COUNTRIES: SUMMARY OF CURRENT,CAPITAL, AND OVER-ALL BALANCES, 1965-67


Current Balance


Total



Total

Grand Total

16965

-1945

-129-279-38

-489-935

-1,098

-954-136—454

-1,544

-2,642

19666

-202-8

-81-238

38-567-74-52

-1,184

-542-122-77

-741

-1,925

19677

-162-56

25-191

134-466-51

-102

-869

-691-149-297

-1,137

-2,006

Capital Balance

1965

1005

93248

9338421

—41

903

59636

331

963

1,866

1966

10112

164260

753646578

1,119

562120285

967

2,086

1967

9530

-14204

33093634

697

679115259

1,053

1,7500

Over-All Balance l

1965

-9410

-36-31

55-105

12-6

-195

-358-100-123

-581

-776

1966

-1014

8322

113-203

-926

-65

20-2208

226

161

1967

-67-26

1113

137-157-15-68

-172

-12-34-38

-84

-256

Sources: Data reported to the International Monetary Fund and staff estimates.1 Over-all balance measures the balance financed by changes in official gold and foreign exchange assets, and in the net

Fund position. Figures for 1967 have been adjusted to exclude estimated losses arising from the devaluation of sterling:Ireland, Australia, and New Zealand were the countries principally affected.



was an abrupt change of the trend in importsafter mid-1966, and a decline occurred from 1966to 1967 as a result of the weakening of domesticgrowth—particularly in investment—and of theplentiful harvest of 1966. The 10 per cent growthof exports from 1966 to 1967, while relativelysatisfactory, was only one third of the riserecorded in 1966, when exports to Cuba, otherLatin American countries, and Eastern Europeincreased very rapidly. Over the period 1961-66Spain had been able to finance a substantial por-tion of its expanding trade deficit from rapidincreases in tourist receipts and workers' remit-tances, but in 1967 these receipts in total werelower than in 1966. Although the net inflow ofprivate long-term capital was considerably higherin 1967, this was more than offset by an unfavor-able turn-around in short-term flows. The Spanishpeseta was devalued in November by the samepercentage as the pound sterling; accompanyingmeasures included a freeze on wages and manyprices in 1968, a strengthening of the fiscal posi-tion, and a more stringent monetary policy.

Agricultural conditions in the other southernEuropean primary producing countries were alsofavorable in 1967; except for Portugal, the samehad been true in 1966. In Turkey industrialproduction continued to increase rapidly andinvestment remained strong, but industrial output

was little changed from 1966 to 1967 in Portugaland Yugoslavia and was considerably less buoyantin Greece than in the previous year. In Yugo-slavia exports increased little from 1966 to 1967as sales to Germany and to some less developedcountries fell off, while imports continued to rise,although at a much slower rate than in the previ-ous year. The other southern European primaryproducing countries, like Spain, realized somereduction in their trade deficits from 1966 to1967: the rate of export growth in Greece, Por-tugal, and Turkey was very close to that of theprevious year, while their imports declined.Although the surge came somewhat later thanin Spain, tourism and workers' remittances arean important source of foreign exchange for thesecountries. They had all derived support for theirpayments positions in 1966 from increased sur-pluses on account of services and private trans-fers, but in 1967 the slowdown in industrial coun-tries contributed to reductions in these receiptsin Greece and Turkey and a smaller increase thanin the previous year in Portugal. The net inflowsof capital to these countries also declined in 1967.As a result of these developments the pattern ofreduced trade deficits was not reflected in cor-respondingly improved over-all balance of pay-ments positions.


Chapter 7

Gold

URING 1967 and early 1968, there was acontinued and, in certain periods, exception-

ally high nonmonetary demand for gold. Thisdemand caused a heavy drain on the official goldreserves of the seven selling members of the goldpool and led to the closing of the London goldmarket on March 15, 1968. The Governors of thecentral banks of the countries concerned (Belgium,Germany, Italy, the Netherlands, Switzerland, theUnited Kingdom, and the United States) exam-ined the operations of the pool at a meeting inWashington on March 16 and 17, 1968. As aresult of their deliberations, the gold pool arrange-ments which had been devised in 1961 wereeffectively brought to an end. At the conclusionof their meeting in Washington they issued acommunique in which it was stated, inter alia,that: "They noted that the U.S. Governmentwill continue to buy and sell gold at the existingprice of $35 an ounce in transactions with mone-tary authorities. . . . The Governors believe thathenceforth officially held gold should be used onlyto effect transfers among monetary authoritiesand, therefore, they decided no longer to supplygold to the London gold market or any othergold market. Moreover, as the existing stock ofmonetary gold is sufficient in view of the prospec-tive establishment of the facility for Special Draw-ing Rights, they no longer feel it necessary to buygold from the market. Finally, they agreed thathenceforth they will not sell gold to monetaryauthorities to replace gold sold in private markets."

At the same time the Managing Director of theFund, who had attended the Washington meeting,issued a personal statement indicating that thedecision not to supply gold from monetary reservesto the markets was readily understandable as ameans of conserving the stock of monetary gold.The Managing Director went on to say that "Thedecision, of course, involves no departure fromthe obligation of these countries to maintain thepar values of their currencies established with the

International Monetary Fund. Countries adheringto the Articles of Agreement of the Fund under-take to collaborate with the Fund to promoteexchange stability and to maintain orderlyexchange arrangements with each other. It is mostimportant that the monetary authorities of allmember countries should continue to conduct goldtransactions consistently with this understandingand that they should cooperate fully to conservethe stock of monetary gold. Such action will bean important contribution to the functioning ofthe international monetary system.

"In the longer run it will not be sufficient simplyto conserve global reserves. In this connection itis to be noted that work on the establishmentof the special drawing rights facility in the Fundis proceeding on schedule. It is to be hoped thatthis facility will enter into force with the leastpossible delay in order to make it possible tosupplement existing reserve assets as and whenneeded."

A number of other central banks have inthe meantime also announced that they wouldnot buy or sell official gold on the free market,and some changes in gold regulations and market-ing procedures have resulted. The main effect ofthe procedures outlined in the communique wasthat two prices for gold came into existence: anofficial price of $35 a fine ounce, plus or minusa margin not exceeding the margin of 1 per centprescribed by the Fund, for dealings among mone-tary authorities, and a free market price, to fluc-tuate in accordance with supply and demand.The average price for gold in the London markethas fluctuated substantially; between the beginningof April and the end of June, the price has rangedfrom $38 a fine ounce to a high point of $42.60 afine ounce.

The U.S. Treasury announced that it wouldno longer purchase gold from any private sourcenor would it sell gold to licensed domestic indus-trial and artistic users. These consumers must

83

D



satisfy their requirements at home or abroad at thefree market price within the limits of their licenses.Since March 1968, a number of banks and com-modity firms have obtained licenses to acquiregold from private sources for sale to licensedindustrial users and also to export freely to foreignbuyers. These authorized gold dealers quote vari-ous competitive daily prices based on the costsof obtaining supplies of gold.

The London market was closed from March 15to April 1, 1968. On its reopening, the Bank ofEngland issued revised instructions for marketingoperations. Forward transactions in gold couldtake place only with the prior permission of theBank of England, and authorized banks wouldnot be permitted to finance purchases of goldby nonresidents by lending foreign currency or byaccepting gold as collateral for foreign currencyadvances. At the same time the gold dealersannounced that, henceforward, the price of gold inthe London market would be quoted in terms ofU.S. dollars; they also stated that they wouldwaive commission charges on gold purchases andimpose a charge of 1A of 1 per cent on gold sales.In other respects the market continued underpreviously existing exchange control regulationsand market conditions of operation.

South Africa suspended all sales of gold abroadfollowing the closing of the London market. TheMinister of Finance stated at the time of presenta-tion of the budget that in the light of South Africa'sbalance of payments surplus there was no need tosell gold at that time. Newly mined gold would bepurchased by the South African Reserve Bank forfuture sales to both the free and official markets.

On March 15 gold trading was suspended inCanada at the request of the Minister of Finance.Shortly thereafter the suspension was relaxed inrespect of overseas dealings as brokers and inrespect of sales for industrial and artistic purposes,and on April 3 the remaining temporary restric-tions were removed. The Mint would continueto buy gold from producers at $35 an ounce con-verted into Canadian dollars at current exchangerates and would, for the time being, sell its goldin the free market.

After March 18, 1968 the daily turnover in theZurich gold market increased markedly to areported range of 7 tons to 20 tons, compared witha normal 3 tons or less before March 1968. The

Zurich gold market is generally regarded as aretail market and offers a wide array of dealingfacilities for such purposes. Of the major golddealing centers, Zurich is the only one that, afterApril 1, 1968, offered unrestricted forward facili-ties for dealing in gold.

In other changes, trading in gold was freed fromrestriction in the Netherlands on March 20, 1968;free gold trading in Amsterdam, the traditionalgold market, had been suspended in May 1940.The Austrian National Bank discontinued publi-cation of its buying price for gold on March 20.The Bank of Italy announced on March 22 thatit would no longer buy gold from private sellers.Japan took temporary measures to stop the buy-ing of 5 per cent of domestically produced goldfor foreign exchange reserves from April 1, 1968.In May 1968 the Indonesian Government bannedroutine imports of gold and silver to check domes-tic speculation in these metals.

On June 18, 1968 the Board of Directors of theFrankfurt Stock Exchange Association announcedthe opening of a fine metals market (with trad-ing initially limited to gold). The market isorganized by a group of important domesticcommercial banks, including the three largest,and the leading gold processor and bullion dealer.Gold prices are determined at a daily fixing andare posted on the Frankfurt Stock Exchange.

Gold Holdings

Official Holdings

Official gold stocks declined sharply duringthe calendar year 1967. This was the second con-secutive year that losses have been recorded—the equivalent of $1,580 million in 1967, com-pared with $45 million during 1966 (Table 23and Chart 24). The total supply of gold coming tothe market in 1967 (recorded and estimatedproduction plus sales by the U.S.S.R. less pur-chases by mainland China) was slightly higherthan in 1966, although, as in 1966, the totalamount of gold supplies was lower than the aver-age for some years past. Total recorded officialgold stocks amounted to $41.6 billion at the endof 1967. Changes in the distribution of goldreserves during the year are discussed in Chapter 4.

Newly mined gold amounted to approximately$1,410 million in 1967 and this was supplemented


GOLD 85

TABLE 23. GOLD: MARKETED STOCKS AND DISTRIBUTIONBY USE, 1965-FmsT QUARTER 1968


1965 1966

1968First

1967 Quarter

Production a

Sales by the U.S.S.R.Purchases by mainland China

Total new supplies

Change in countries' monetarygold stock l

IMF gold transactions 3- 4

BIS and EF gold transactions 3

Total added to officialmonetary gold stock *(rounded)

Residual: consumption inindustry and arts, andprivate hoarding

1,440 1,440 1,410 3502

550 — 15 11-150 —75 —20 —

1,840 1,365 1,405 361

1,005 -950 —1,400 -1,710

-311-487

783121

30— 209

20279

210 -45 -1,580 -1,410

1,630 1,410 2,985 1,770

Sources: International Monetary Fund, International FinancialStatistics, and staff estimates.

1 Excluding CMEA countries, mainland China, etc.2 Estimated.3 Minus sign denotes net outflow of gold from the International

Monetary Fund, the Bank for International Settlements, and theEuropean Fund.

4 Excluding gold placed on general deposit in London and NewYork amounting to $254 million in 1966, $23 million in 1967, and$8 million in the first quarter of 1968.

by sales of about $15 million from the U.S.S.R.on behalf of some Eastern European countries.Mainland China was again reported as a buyer ofgold to the estimated value of $20 million,compared with some $75 million in 1966 and$150 million in 1965. Absorption of gold byindustry and the arts and by private hoardingappears to have been of the order of $3.0 billion,$1.6 billion more than in 1966, and $1.4 billionmore than in the previous peak year of 1965.Since 1951 it is estimated that $16.5 billion ofgold has been used by industry and the arts or hasgone into private holdings.

During the first quarter of 1968 countries'monetary gold stocks continued to fall sharply,the decline amounting to $1,710 million, whichwas $310 million larger than that recorded forthe year 1967. Recorded official gold holdings(including those of the Fund, the Bank for Inter-national Settlements, and the European Fund)fell by $1,410 million, to $40.2 billion at the endof March 1968. After taking into account theoutput of newly mined gold, which can be esti-mated at $350 million during the quarter, andsales by the U.S.S.R. of $11 million, privateabsorption of gold appears to have reached$1,770 million—of which $210 million is esti-mated acquisition by industry and the arts.

Gold holdings of the Fund increased duringcalendar year 1967 by a net of $53 million to total$3,759 million. This total includes the equivalentof $800 million invested in U.S. Governmentshort-term securities (recoverable in gold upontermination of the investment) and $278 millionheld under general deposit. The total amount ofgold received by the Fund in respect of subscrip-tions amounted to the equivalent of $34 million,of which $23 million was placed on general depositwith the Fund's gold depositories in New York andLondon, in accordance with the arrangements pro-vided for in the report of the Executive Directorsto the Board of Governors concerning Increasesin Quotas of Members—Fourth QuinquennialReview, dated February 26, 1965.1 Gold receivedby the Fund in respect of charges amounted to$23 million, which was offset in part by interestpaid in gold by the Fund, amounting to $15 mil-lion, in respect of borrowings by the Fund ofmembers' currencies under the General Arrange-ments to Borrow (GAB) and through specialarrangements with Italy. Repurchases of members'currencies from the Fund against gold amountedto $11 million.

During the first quarter of 1968 the gold hold-ings of the Fund increased by a net $28 million(including an increase of $8 million held undergeneral deposit). Gold received in respect of sub-scriptions amounted to the equivalent of $21 mil-lion, of which as noted $8 million was placedon general deposit. The equivalent of $8 millionin gold was received in respect of charges, whilethe Fund paid interest in gold of $3 million on bor-rowings under the GAB and the special arrange-ments with Italy. Repurchases of members' cur-rencies against gold amounted to $2 million.

Private Absorption

In calendar year 1967 and in the period up toMarch 17, 1968, private absorption of goldreached new heights. The very sharp increase intotal off-take from the gold markets on this accountbegan in mid-October 1967 and, as explained else-where in this Report, was intensified by the devalu-ation of sterling in November 1967 and the subse-quent loss of confidence in some currencies.

Efforts to improve information in the field ofprivate absorption of gold have not yet yielded

1 See Annual Report, 7965, pages 33-34.



CHART 24. GOLD: ESTIMATED NEW SUPPLIES AND ABSORPTION, 1951-FiRST QUARTER 1968


1 Including purchases by mainland China amounting to the equivalent of $150 million in 1965, $75 million in 1966, and$20 million in 1967.

2 Excluding CMEA countries, mainland China, etc.


GOLD 87

TABLE 24. GOLD: MARKETED STOCKS AND DISTRIBUTION BY USE, 1956-FmsT QUARTER 1968

(In millions of U.S. dollars}

Year

1956150150195919601961

196219631964196519661967

1968 First Quarter

(A)Newly

AvailableGold1

1,1251,2751,2851,3801,3781,540

1,5151,9061,8561,8401,3651,405

360"

(B)Additionsto WorldMonetary

Stock 2

490690680750310615

355825715210

-45-1,580

-1,410

(C)Estimated IndustrialAnd

BIS

165195200220265285

330325430465500 r>

Artistic Use 3

U.S. Bureauof the Mint

80456560

11095

60659095

225°805°

210°

(D)Estimated

PrivateHoarding 4

390345340350695545

770690620

1,070685

2,180

1,5601 New production plus sales by the U.S.S.R. less purchases by mainland China.2 Data from International Monetary Fund, International Financial Statistics.3 Based on series published by the Bank for International Settlements (BIS), Annual Report, 1966, for 12 countries

and by the U.S. Bureau of the Mint for an additional 29 countries not covered by the BIS series.4 The residual amount, Columns A—(B+C)=D.5 BIS, Annual Report, 1967.0 Fund staff estimate.

positive results. A comparatively large numberof countries have no controls over the use ofgold by industry or ownership by private citizensand there is, consequently, no ready means ofobtaining accurate statistics. Furthermore, in someof these countries, e.g., Switzerland, France, andLebanon, important gold markets operate, compli-cating further the collection of accurate dataregarding the private absorption of gold. Informa-tion presented in this Report must, therefore, stillbe regarded as highly tentative. Table 24 has beenupdated to cover 1967 and the first quarter of1968 by assuming a slightly increased rate (ofabout 12 per cent per annum) of consumption forthe "Estimated Industrial and Artistic Use." Prvious figures have indicated that the annual rateof increase in such consumption might be of theorder of 10 per cent. However, the disruptionin the gold markets toward the end of 1967 hasbeen reported as causing some build-up of indus-trial stocks. Estimated private hoarding, given inColumn D, is again the residual amount. Theincrease over the 1966 figure demonstrates quiteclearly the impact of the unsettled conditionswhich existed in the international gold and foreignexchange markets at the end of 1967 and early1968.

Gold Production

Gold production declined during 1967 afterhaving been stationary in 1966; the decline in1967 was the first in 14 years. Output decreasedby 2.3 per cent, excluding the production ofCMEA countries, mainland China, etc.,2 onwhich no reliable information is available. Totalproduction was about 40.3 million ounces, worth(at $35 a fine ounce) approximately $1,410 million (Table 25). Of the 11 countries shown in thetable, the total production increased in only three—Ghana, Japan, and the Philippines. In SouthAfrica, production decreased for the first time inover 20 years. Production also declined in Can-ada, the United States, and Australia.

In South Africa gold production fell in 1967by 1.1 per cent from the level recorded in 1966;nevertheless, South African output constitutedmore than 75 per cent of total production (ofthe area covered), compared with just over50 per cent a decade ago.

For the first time in many years, the tonnageof ore milled by members of the Chamber of Minesof South Africa fell in 1967, and the average grade

2 See footnote 1, page 27.


ANNUAL REPORT, 1968

TABLE 25. GOLD: VALUE OF WORLD PRODUCTION, 1940, 1945, AND 1963-67 '

(In millions of U.S. dollars at US$35 a fine ounce)

South AfricaCanadaUnited StatesAustraliaGhana

RhodesiaJapan 2

PhilippinesColombiaCongo, Dem. Rep. ofMexico

Other 3

Total 3

1940

4921861705731

293039222031

157

1,264

1945

42895322319

203

—181217

69

736

1963

961139513632

2015131188

62

1,356

1964

1,019133513430

2016151387

60

1,406

1965

1,069126593127

1918151128

55

1,440

1966

1,081115633224

1819161068

50

1,442

1967

1,068104522927

182417957

50

1,410

Source: International Monetary Fund, International Financial Statistics.1 Excluding the output of CMEA countries, mainland China, etc.2 Figures in the table include gold obtained in refining imported copper ore, which is returned to the ore-exporting

countries. Excluding these re-exports of gold the figures would be 30, 3, 12, 12, 13, 16, and 18.8 These figures include estimates for data not available.

of ore also declined slightly. Combined workingprofits from gold, uranium, and other products fellfurther in 1967 to R 308 million ($431 million)after having fallen to R 326 million ($456 million)in 1966. Although only about 2 per cent of SouthAfrican production is mined at a loss, 70 per centof the total profits and about one third of produc-tion is accounted for by the 10 largest of the 44gold mines operating as members of the Chamberof Mines. The profits of this group in 1967 wereslightly lower than in 1966, and their output hadrisen by only 0.6 per cent, while working costs perton milled increased by almost 3 per cent in 1967.

It is difficult to estimate the trend of SouthAfrican gold production over the next few years.The start of production of two new mines inearly 1968, the implementation of new subsidyarrangements (see p. 92), and further techno-logical innovation, especially a new rock cutterwhich is being tested and, if successful, couldreduce working costs up to 20 per cent, would alltend to a further increase in output of gold. Butit is difficult at this stage to assess the impactof a higher free price of gold on the longevityof existing mine operations or on further explora-tion. Whether mining profits would increase as aresult of higher prices on the free markets willbe influenced, among other things, by the amountof gold that South Africa may sell on the freemarkets as well as by the structure of income taxa-

tion of the gold mines and by the amount of leasepayments.

Canadian gold production, which totaled$104 million, fell by about 10 per cent in 1967owing to the closing of four mines that had beenparticularly affected by labor shortages, risingproduction costs, and diminishing ore reserves.Gold production in the United States declinedby 18 per cent from the previous year, primarilyowing to the effects of the long strikes at majorcopper mining and smelting companies; aboutone third of the country's gold production is aby-product of copper mining. Total productionwas put at 1.5 million ounces, valued at $52 mil-lion. Gold production is likely to be favorablyaffected by the opening of a new mine projectand resumption of activity in the copper industry.

Gold production in the other countries coveredin Table 25, taken as a group, showed a slightincrease in 1967. There has been a growth of goldexploration in the last few years and gold dis-coveries have been made in Afghanistan, Brazil,British Honduras, Ghana, India, and Rhodesia.The quantity of payable ore is thought to be smallin most cases. New gold discoveries have beenreported in the U.S.S.R., and a major reorganiza-tion of the Siberian gold industry is reportedbeing prepared in order to reduce the high costsof Soviet gold production.

88


GOLD 89

Gold Movements

United States

During 1967 official sales of gold abroad(including gold pool operations) by the U.S. Treas-ury totaled $1,009 million, net of U.S. purchasesand domestic industrial use (Table 26). In thefirst quarter of 1968 the U.S. Treasury sold about$1,309 million net, surpassing the total for theentire year 1967. In addition, the equivalent of$160 million was sold from U.S. gold stock in1967 and $52.5 million in the period January 1to March 15, 1968 to cover demand for indus-trial, professional, and artistic use not met by newproduction and recovered gold. After March 15,1968 the Treasury ceased sales of gold to licensedindustrial users. On March 18, 1968 the UnitedStates formally removed the 25 per cent goldcover for Federal Reserve notes which had pre-viously been a legal requirement, the congressionalbill for this removal having been proposed in 1967.

Purchases of gold from abroad amounted to$204 million during 1967 and to $50 million inthe first quarter of 1968. The bulk of the pur-chases, equivalent to $150 million in the lastquarter of 1967 and $50 million in the first quarterof 1968, was made from Canada. During the firstthree quarters of 1967 Peru sold the equivalentof $35 million to the United States.

In the first quarter of 1967 the equivalent of$3 million (net) was purchased from the UnitedKingdom; however, over the year the figures shownet sales to that country of $878 million. Duringthe first quarter of 1968 net gold sales to theUnited Kingdom rose to $900 million. Thesesales to the United Kingdom include the U.S.share of gold pool losses during the year and upto March 15, 1968. The U.S. share in the poolwas 50 per cent until June 1967, when the UnitedStates assumed France's contributing share of9 per cent. The Bank of England, as agent forthe gold pool, announced that the selling mem-bers of the pool sold over $3 billion of goldbetween the time of the devaluation of sterling onNovember 18, 1967, and their Washington meet-ing on March 16 and 17, 1968.

Other sales of gold by the U.S. Treasuryincluded the equivalent of $30 million to Switzer-land in the second quarter of 1967, and $25 mil-lion in the first quarter of 1968; the equivalent of

$150 million was sold to Algeria in the lastquarter of 1967; also $85 million was sold toItaly in the last quarter of 1967 and a further$184 million was sold in the first quarter of1968. The equivalent of $48 million was sold tothe Netherlands in the first quarter of 1968.In addition, certain Fund members purchased goldfrom the United States to enable them to pay thegold portion of their subscriptions to the Fund inrespect of their increased quotas. These sales are

TABLE 26. UNITED STATES: GOLD TRANSACTIONS,1965-FmsT QUARTER 1968


1965 1966 1967

1968First

Quarter

Purchases fromBrazilCanadaItalyPeruUnited KingdomOther countries

Total

Sales toAlgeriaAustriaBelgiumFranceItalyNetherlandsSpainSwitzerlandTurkeyUnited KingdomOther countriesIndustrial, professional.

artistic

Total

Transfer to InternationalMonetary Fund

Total

Net decrease in stocks

25.2——

—149.738.4

213.3

—100.082.7

884.280.035.0

180.050.036.8—52.5

117.9

1,619.1

258.8^

1,877.9

1,664.6

—200.0—

—79.833.1

312.9

—

——600.960.0——2.012.5—68.3

140.6

884.3

—

884.3

571.4

—150.0—35.0—19.0

204.0

149.6——

—85.0——30.0

0.1878.5 !70.2

160.2

1,373.6

—

1,373.6

1,169.6

—50——

—0.2

50.2

——25.0—

184.048.5—25.0

—899.6 1

177.4

52.5

1,412.0

—

1,412.0

1,361.8

Source: U.S. Treasury Department, Foreign Gold Transactions.1 These totals largely reflect the U.S. share in the gold pool

arrangements for which the Bank of England acted as agent.2 Since the increase in Fund quotas did not take effect until

calendar 1966, this transfer to the Fund is recorded elsewhere inthis Report as being effected by the U.S. Treasury during calendar1966.

not included in the net sales of $ 1,009 million and$1,309 million mentioned above, as the Fund hasplaced an equivalent amount of gold on generaldeposit with the Federal Reserve Bank of NewYork. On April 30, 1968, the Fund's general golddeposit with the Federal Reserve Bank of NewYork amounted to the equivalent of $245 million.Under a similar arrangement the Fund had placedthe equivalent of $44 million on general depositwith the Bank of England.



The amount of gold held under earmark byFederal Reserve Banks for accounts of foreigngovernments, central banks, and internationalorganizations increased in 1967 by the equivalentof $307 million, to $13,253 million.

United Kingdom

The United Kingdom sold the equivalent of$649 million of gold during 1967, the bulk ofthe sales occurring in the last quarter of 1967.These sales reflected the United Kingdom's shareof the gold pool losses and also its balance ofpayments deficit.3 In the first quarter of 1968, theUnited Kingdom exported gold bullion equivalentto $1,070 million. A considerable proportion ofthese exports reflected the gold pool operations forthe first ten weeks of the year; almost $450 millionof bullion was exported to Switzerland and Liech-tenstein during the quarter.

Gold Markets and PricesLondon

During 1967 and up to the temporary closingof the London gold market on March 15, 1968,the demand for gold from the London marketwas comparatively strong and, at certain periods,became intense. Up to March 15, 1968, theprice of gold was maintained below $35.20 afine ounce through the operations of the goldpool, but for much of the period the price wason the high side of the pool's effective range ofabout $35.08 to $35.20 a fine ounce (Chart 25),and, except for short periods of time, the gold poolsupplied the market with considerable quantitiesof gold to keep down the price. This was particu-larly apparent in the three-month period centeringon the devaluation of sterling on November 18when the demand for gold was very strong, andfor many days during that period the "fixing"price for gold was $35.19% a fine ounce. Therewere, however, short spells of relative calm inthe market as, for example, following the Frank-furt meeting of the representatives of the centralbanks of the seven selling members of the goldpool on November 26, 1967. Demand was againonly moderate in the latter part of Decemberand in the first half of January 1968 following anannouncement by the United States on Decem-ber 16 that it stood firm in its determination to

3 On these sales see further page 42.

maintain the gold value of the dollar and thatthe operation of the London gold market wouldremain unchanged. Nevertheless, by the end ofFebruary demand increased to very high levels.The demand for gold was not allayed by anannouncement of the selling members of the goldpool, meeting at the Bank for International Settle-ments in Basle on March 10, that "the centralbanks contributing to the London gold poolreaffirmed their determination to continue theirsupport to the pool based on the fixed price of$35 per ounce of gold." Indeed, the increase indemand rose to panic proportions and a decisionwas made to close the London gold market onMarch 15, thus stopping the drain on officialmonetary reserves.

During their meeting in Washington onMarch 16 and 17, 1968, the selling members ofthe gold pool, as noted above, decided to stopsupplying gold from monetary reserves to theLondon gold market or any other gold market.The London market remained closed until April 1,1968 to allow the market to regain its stability.Upon reopening, the private purchase and saleof gold was carried out at free market rates, andtwo daily price fixings were established.

For most of the month following the reopeningof the market, trading was light but prices tendedto drift upward (Chart 26). The first fixing uponreopening was set at $38.00 a fine ounce, anincrease of 8 per cent from the previous fixingon March 14. By mid-May comparatively heavydemand for gold was encountered and by May 21the price of gold reached $42.60 a fine ounce.Thereafter, demand moderated and prices fell toabout $41 a fine ounce in the last week ofJune.

Paris

The November 1967 gold rush also affectedthe Paris market, sending bar gold to a highequivalent price of $35.55 an ounce, sovereignsto $44.99 per ounce of gold, and napoleons toa record high of $59.01 a fine ounce on Decem-ber 15. Sales reached 15 tons to 18 tons a daycompared with previous sales which averaged lessthan 1 ton. By the end of December, bar and coinprices had fallen to their pre-November levels,about $43 a fine ounce for sovereigns and about$54.50 a fine ounce for napoleons.


GOLD 91

CHART 25. GOLD: PRICE IN LONDON MARKET, MONTHLY AVERAGES, MARCH 1954-MARCH 14, 1968

(In U.S. dollars a fine ounce)

In March 1968 gold prices began to rise again.On March 15, when the Paris gold marketremained open despite the closing of the Londonand Zurich markets, the kilogram ingot was fixedat the equivalent of $44.41 a fine ounce (26.9 percent above the price of $35 a fine ounce); saleswere reported to be about 45 tons or 65 timeswhat had been considered normal.

During April the Paris price moved parallel tothe London price. In early May 1968 it wasannounced that the operational capacity of themarket would be extended. Six banks would dealin gold, including 12.5 kilogram bars, and bullionprices would be established by these banks at atwice-daily fixing. However, at the end of May1968 temporary foreign exchange control meas-ures were introduced which, inter alia, affected theoperation of the gold market. Imports and exportsof gold became subject to prior governmentauthorization, and, taken in conjunction with otherexchange control regulations, this effectively closedthe Paris gold market for international dealings.Gold prices in Paris rose above the levels ruling

in London and Zurich, the spread reflecting theimpossibility of effecting arbitrage operations.

Zurich

Zurich has always been a leading center for thetrading of gold coins. Since sterling devaluation,

CHART 26: GOLD: PRICES IN LONDON AND ZURICH,MARCH-JUNE 1968

(In U.S. dollars a fine ounce)



however, bar gold trading in Zurich has becomesubstantially heavier than what was considerednormal in the past. In mid-March 1968, demandwas extremely heavy, but this demand wasreflected largely in the London figures. This marketwas also closed on March 15, and, at its reopeningon March 18, demand was reported at about 20tons, compared with demand of about 100 tons fora number of days preceding. Between March 18and June 28, equivalent price quotations rangedfrom $36.88 to $42.25 a fine ounce.

Developments in Other Markets

The price for bar gold fluctuated within ratherwide ranges in important free markets such asBeirut and Hong Kong. During the period May 1,1967 to April 30, 1968, the price of bar gold inBeirut rose from $35.36 a fine ounce to $39.29 afine ounce and rose by a further $2.50 a fine ounceby the end of June 1968. In Hong Kong, wheregold prices are usually higher than in Europe andBeirut, because of transportation costs and therelatively small units traded, the price of bar goldrose from $40.23 a fine ounce in May 1967 to$43.48 in April 1968 and to $44.49 by the end ofJune 1968.

In the Bombay gold market prices were muchsteadier. Prices in this market, however, essen-tially reflect domestic demand and supply condi-tions in a closed market. The price of bar gold,which was $64.90 a fine ounce at the beginningof May 1967, rose to $65.11 a year later and, bythe end of June 1968, was $65.73 a fine ounce.

On the basis of the 1945 Currency Act, theNetherlands Bank issued a general permit allow-ing a free gold market in Amsterdam on March 20,1968. The volume of transactions has been and isexpected to remain small. On March 29 and

April 1, the equivalent prices quoted in this marketwere $39.00 and $38.25 a fine ounce, respec-tively.

Gold Subsidy Programs

The gold subsidy programs of Australia,4 thePhilippines,5 and Rhodesia,6 discussed in previousAnnual Reports, have continued in operation dur-ing the past year.

Canada has consulted the Fund with regard tothe extension for a period of three years, to Decem-ber 31, 1970, of its present governmental assist-ance to gold producers.7

South Africa has also consulted the Fund withregard to changes in its gold subsidy scheme. TheGovernment proposed to continue assistance tomarginal mines for water pumping, introduced in1963, to discontinue the granting of unsecuredloans,6 and to implement, effective April 1, 1968,a new scheme for marginal gold mines. This newscheme is open to mines that, without the benefitof assistance, are likely to close within eight years.These mines would have to lower their operatingpay limit before qualifying for a tax reduction orfor an actual grant ("negative tax"), each deter-mined by a fixed formula.

The Fund has deemed the arrangements byCanada and South Africa to be not inconsistentwith the objectives of the Fund's statement ongold subsidies dated December 11, 1947.

*See Annual Report, 1960, page 144; 1963, page 181;1965, page 103.

5 See Annual Report, 1962, page 164; 1963, page 181;7967, page 124.

(i See Annual Report, 1964, page 109.7 See Annual Report, 1959, pages 149-50; 7967, pages

125-26; 1964, page 109.


SUPPLEMENTARY NOTES


A. Activities of the Fund

HIS note presents more detail than containedin Chapter 3 on the activities of the Fund

during the past year other than those related to theProposed Amendment of the Fund's Articles ofAgreement dealt with in Chapter 2. For someaspects of its work, the data cover the period sincethe Fund's inception.

Membership

The Gambia became a member of the Fund onSeptember 21, 1967, with a quota of $5 million,bringing the Fund's total membership to 107.During the fiscal year 1967/68, the Board ofGovernors approved the terms and conditions forthe admission of Botswana and Lesotho to mem-bership. Applications for membership from Maltaand Mauritius were also under consideration at theend of the fiscal year. With the additional memberand the increases in quotas shown in Table 29,the aggregate of Fund quotas on April 30, 1968was $21,119 million, compared with $20,921million a year earlier.

Executive Directors

A list of the Executive Directors and AlternateExecutive Directors and their voting power as ofApril 30, 1968 is given in Appendix II; changesin membership of the Executive Board during1967/68 are shown in Appendix III.

Article VIII

Last year's Annual Report noted that threecountries accepted the obligations of Article VIII,Sections 2, 3, and 4, of the Fund Agreement earlyin the fiscal year 1967/68. These were Denmark,with effect from May 1; Norway, with effect fromMay 11; and Bolivia, with effect from June 5,1967. The 31 members that have rendered their

currencies convertible under the Articles of Agree-ment are listed in Table 27.

TABLE 27. COUNTRIES THAT HAVE ACCEPTEDARTICLE VIII, APRIL 30, 1968

MemberEffective Dateof Acceptance

AustraliaAustriaBelgiumBoliviaCanada

Costa RicaDenmarkDominican RepublicEl SalvadorFrance

GermanyGuatemalaGuyanaHaitiHonduras

IrelandItalyJamaicaJapanKuwait

LuxembourgMexicoNetherlandsNicaraguaNorway

PanamaPeruSaudi ArabiaSwedenUnited KingdomUnited States

July 1, 1965August 1, 1962February 15, 1961June 5, 1967March 25, 1952

February 1, 1965May 1, 1967August 1, 1953November 6, 1946February 15, 1961

February 15, 1961January 27, 1947December 27, 1966December 22, 1953July 1, 1950

February 15, 1961February 15, 1961February 22, 1963April 1, 1964April 5, 1963

February 15, 1961November 12, 1946February 15, 1961July 20, 1964May 11, 1967

November 26, 1946February 15, 1961March 22, 1961February 15, 1961February 15, 1961December 10, 1946

Par Values

Two members established initial par values withthe Fund and 17 members received the Fund'sconcurrence on changes in their par values duringthe fiscal year 1967/68. A list of these membersand the par values agreed is given in Table 28.

New currency units affecting par values wereintroduced in two countries. The Government ofNew Zealand introduced a decimal unit—the NewZealand dollar—to replace the New Zealandpound, on July 10, 1967; and the Government of

95

T



TABLE 28. INITIAL PAR VALUES ESTABLISHED AND CHANGES IN PAR VALUES,FISCAL YEAR ENDED APRIL 30, 1968

Units of Currency Per U.S. Dollarof the Weight and Fineness in Effect on July 1, 1944

Member

CeylonCyprusDenmarkFinlandGhana

GuyanaIcelandIrelandIsraelJamaica

MalawiNepalNew Zealand

Sierra Leone

SingaporeSpainTrinidad and TobagoUnited KingdomZambia

Antigua ^DominicaMontserratSt. Christopher- >

Nevis-AnguillaSt. LuciaSt. Vincent J

British Honduras

Bermuda Falkland IslandsGibraltar

Fiji

Hong Kong

Mauritius 4

Seychelles

CurrencyUnit

RupeePoundKroneMarkkaNew Cedi

DollarKronaPoundPoundPound

PoundRupeeDollar

Leone

DollarPesetaTT DollarPound SterlingKwacha

Separate Currencies in

East CaribbeanDollar(4.80 perpound sterling)

Dollar(4.00 perpound sterling)

Pound(parity withsterling)

Pound(1.04500 perpound sterling)

Dollar(14.5455 perpound sterling)

Rupee(13V3 perpound sterling)

Changes in par valueInitial

par value From

4.761900.3571436.907143.200000.714286

1.7142943.00000.3571433.000000.357143

0.35714310.1250

0.359596 10.7191940.714286

3.0612260.0000

1.714290.3571430.3571432

To

5.952370.4166677.500004.199971.02041

2.0000057.00000.4166673.500000.416667

0.416667

0.7191940.8928570.833333

70.00002.000000.4166670.714286

Effective Date

Nov. 21, 1967Nov. 20, 1967Nov. 21, 1967Oct. 12,1967July 8, 1967

Nov. 20, 1967Nov. 27, 1967Nov. 18, 1967Nov. 19, 1967Nov. 21, 1967

Nov. 20, 1967Dec. 11, 1967July 10,1967Nov. 20, 1967Nov. 21, 1967

June 12, 1967Nov. 20,1967Nov. 22, 1967Nov. 18, 1967Jan. 16, 1968

Nonmetropolitan Areas of the United Kingdom 3

1.71429

1.42857

0.357143

0.3964290.462500

5.714296.66667

4.76190

2.00000

1.66667

0.416667

0.4625000.435417

6.666676.06061

5.55555

Nov. 18, 1967

Nov. 18, 1967

Nov. 18, 1967

Nov. 18, 1967Nov. 26, 1967

Nov. 18, 1967Nov. 22, 1967

Nov. 18, 1967

1 Par value of the New Zealand pound, former currency unit. The par value of the new currency unit did not involve any appreciation ordepreciation of the currency.2 Par value of the Zambian pound, former currency unit. The par value of the new currency did not involve any appreciation or deprecia-tion of the currency.3 There was no change in the par values of the Bahamian dollar, Bahrain dinar, Brunei dollar, Rhodesian pound, and Tongan pound.4 Mauritius became an independent country on March 12, 1968; consequently, its currency has had no par value agreed with the Fundsince that date.

Zambia also established a decimal unit—thekwacha—to replace the Zambian pound, on Janu-ary 16, 1968. The par values agreed by the mem-ber and the Fund for the New Zealand dollar andthe Zambian kwacha, effective on the dates oftheir introduction, did not involve any apprecia-tion or depreciation of the respective currencies.The Malaysian Government informed the Fundthat, effective June 12, 1967, the name of itscurrency unit would be changed from Malayandollar to Malaysian dollar. Concurrent with thatchange, the Singapore Government put into circu-lation in its territory a new currency, the Singa-pore dollar, to replace the Malayan dollar and

agreed with the Fund an initial par value for thenew currency; the Government of the UnitedKingdom notified the Fund that the Governmentof Brunei had introduced the Brunei dollar toreplace the Malayan dollar on the same date. Fornone of the last three territories was there a changein par value.

The Democratic Republic of Congo, which hadnot established a par value for its currency with theFund, informed the Fund that, effective June 23,1967, a new monetary unit—the zaire—would beintroduced to replace the Congo franc and agreedwith the Fund a new exchange rate of 1 zaire perUS$2.00.


ACTIVITIES OF THE FUND 97

On November 18, 1967, the Fund concurred ina proposal by the United Kingdom for a changein the par value of the pound sterling fromUS$2.80 to US$2.40 per pound sterling. TheU.K. Government also proposed changes, in whichthe Fund concurred, in the par values of most ofthe separate currencies of nonmetropolitan areasin respect of which it accepted the Articles ofAgreement.

Within ten days of the United Kingdom's de-valuation, 13 other members altered their parvalues in agreement with the Fund, moves whichgenerally reflected close economic ties betweenthose countries and the British market or paymentsdifficulties that already had been developing. Nineof these changes (devaluations by Cyprus, Guyana,Ireland, Israel, Jamaica, Malawi, Sierra Leone,Spain, and Trinidad and Tobago) were of thesame proportion—14.3 per cent—as the U.K.devaluation; the other devaluations amounted to7.9 per cent for Denmark, 19.45 per cent for NewZealand, 20 per cent for Ceylon, and 24.6 per centfor Iceland. The Gambia, which had not yetestablished a par value, proposed to the Fund a14.3 per cent change in its exchange rate from0.357143 Gambian pound per U.S. dollar to0.416667 Gambian pound per U.S. dollar, towhich the Fund agreed, effective November 20,1967.1 Somewhat similarly, the initial par valueagreed by Nepal with the Fund on December 11,1967 represented a devaluation of 24.75 per centfrom the previous official exchange rate.

Quotas

By April 30, 1968, 94 members had increasedtheir quotas under the two Resolutions of theBoard of Governors relating to Increases in Quotasof Members—Fourth Quinquennial Review,adopted March 31, 1965, which provided for ageneral increase of 25 per cent for all membersand special increases for 16 members.2 In addition,another member—Burma—had consented to itsauthorized increase, which became effective onMay 27, 1968 upon payment of the amount ofthe increased subscription, 25 per cent in goldand the remainder in the member's currency. The

95 members that consented to the increases repre-sented 95.83 per cent of the total voting power ofthe membership on February 26, 1965, the date ofthe Executive Directors' Report to the Governorsconcerning these increases. Of the 19 membersthat had elected initially to increase their quotasin five equal annual installments, one decided dur-ing the fiscal year 1966/67 and three in 1967/68to accelerate payment as provided under theResolutions and completed their full authorizedincreases.3 The Executive Directors extended theperiod for consent under the First Resolution ofthe Board of Governors (the 16 members thatwere entitled to special increases under the SecondResolution having already taken up their in-creases) to April 30, 1968, at which date theperiod lapsed. Six countries that were Fund mem-bers on February 26, 1965 had not formally con-sented to increases in their quotas under the above-mentioned Resolutions.

The Board of Governors, during the year underreview, approved increases in quotas for 6 mem-bers—Korea, Nigeria, Peru, Trinidad and To-bago, Uruguay, and Viet-Nam—under the Com-pensatory Financing Decision. That Decisionspecifies that the Fund is willing to give sympa-thetic consideration to requests for adjustment ofquotas of certain primary exporting countries, andin particular countries with relatively small quotas,where adjustment would be appropriate to makethem more adequate in the light of fluctuations inexport proceeds and other relevant criteria. Eachmember concerned formally consented to the in-crease, which became effective accordingly—for5 of the countries before the end of the fiscalyear and for Trinidad and Tobago on May 17,1968.

Increases in quotas during 1967/68, shown inTable 29, aggregated $193 million.

Fund TransactionsPurchases

During the past fiscal year 36 members pur-chased currencies amounting to the equivalent of$1,348 million. This total, although below recordlevels attained in previous years, was 27 per cent

1 The latter rate was agreed with the Fund as theinitial par value for the currency of The Gambia onJuly 8, 1968.

2 See Annual Report, 1965, pages 31-34 and 124-32.

3 Possible apparent inconsistency of these data andthose in Table 29 results from the fact that the tabledoes not list two members that recorded two installmentsin 1966/67 and none in 1967/68.



TABLE 29. INCREASES IN QUOTAS, FISCAL YEAR ENDEDAPRIL 30, 1968


New Quota inAccordance With

Member

Quota on General CompensatoryMay 1, increase Financing Effective Date

1967 in quotas Decision of Change

AlgeriaChadChileCongo

(Brazzaville)

Congo,Dem. Rep. of

DahomeyDominican Rep.Gabon

Ivory CoastJordan

KoreaLuxembourg

MalaysiaMauritaniaMoroccoNigerNigeria

PeruRwandaUpper VoltaUruguay

Viet-Nam

66.008.00

100.00

8.00

47.408.00

27.808.00

16.6013.75

24.0015.80

110.008.50

79.208.00

63.00

47.0012.758.00

30.00

29.00

69.001

8.502

125.00

8.502

57.003

8.50 2

29.2018.50 2

17.40 114.501

16.004

16.602

1 15.00 19.00 *

82.801

8.50 2

15.005

8.50238.00

Apr.JuneFeb.

June

JuneJuneMar.May

Mar.Mar.Apr.

50.00 Mar.Aug.

Mar.Apr.Apr.Aug.

100.00 Mar.

85.00 JuneApr.MayJan.

55.00 Feb.39.00 July

26, 196824, 19679, 1968

3, 1967

12, 196716, 196729, 19689, 1967

25, 196822, 196819, 196823, 196816, 1967

25, 196822, 196815, 196829, 196719, 1968

22, 196715, 196817, 196725, 196823, 196831, 1967

1 After payment of the third of five annual installments underthe general increase in quotas.

2 After payment of the second of five annual installments underthe general increase in quotas.

3 After completion of payment under the general increase inquotas, subsequent to earlier payment of first installment.

4 After completion of payment under the general increase inquotas, subsequent to earlier payment of three installments.

5 After completion of payment under the general increase inquotas, subsequent to earlier payment of two installments.

higher than that in 1966/67. Of the $1,348 mil-lion, the equivalent of $441 million was purchasedby 23 members under the terms of stand-by ar-rangements, $220 million by 12 members underthe Fund's Compensatory Financing Decision, $6million by a member in connection with the in-crease in its quota under the First Resolution ofMarch 31, 1965, and $682 million by 7 membersin other transactions. Nigeria purchased currencyfrom the Fund for the first time and Indonesia forthe first time since resumption of membership.Purchases made by Canada and the United Statesrepresented almost one half the total drawingsduring the year.

Table 30 sets out members' purchases of cur-rencies from the Fund during the fiscal year endedApril 30, 1968.

The largest purchase, equivalent to $391 mil-lion, was made by Canada in February 1968. Thisdrawing corresponded to the amount of Canada'sgold subscription paid to the Fund and the amountof Canadian dollars purchased by other membersfrom the Fund. At the same time the Fund also

repaid its $35 million indebtedness to Canadaunder the General Arrangements to Borrow. Thesecond largest purchase, equivalent to $200 mil-lion, also within the member's gold tranche, wasmade by the United States in March 1968. Theamount of this drawing approximately equaledthe total of U.S. dollars used in the above-mentioned Canadian operations.

Stand-By Arrangements

During the past fiscal year the Fund approvedstand-by arrangements for 31 members, author-izing purchases equivalent to $2,352 million. Thesignificant increase of 400 per cent in the amountnot drawn over that at the end of the previousfiscal year was principally the result of the stand-byarrangement equivalent to $1,400 million ap-proved for the United Kingdom in November1967. By April 30, 1968 drawings of currenciesequivalent to $211 million had been made by 14members under these arrangements. Table 31gives data on stand-by arrangements in effectduring the past fiscal year. Some particulars ofarrangements approved during 1967/68 and notfollowing similar arrangements existing for thesame countries in the previous year are given inthe following paragraphs.

Argentina. In May 1967 the Fund approved astand-by arrangement for Argentina, authorizingdrawings up to $125 million. This arrangementwas canceled on April 14, 1968 and a new ar-rangement, for the same amount, was agreed onApril 15. Both stand-by arrangements were insupport of Argentina's efforts directed at achievingfinancial stability and improving the rate of eco-nomic growth. No drawings were made under thesearrangements during the fiscal year.

Chile. A stand-by arrangement for Chile, effec-tive in March 1968, authorized drawings up to theequivalent of $46 million to support a programdesigned to ensure continuing progress toward theachievement of economic growth and the controlof inflation. Under the arrangement $19 millionhad been drawn by April 30.

Democratic Republic of Congo. In July 1967the Fund approved a stand-by arrangement forthe Democratic Republic of Congo, the first forthis member, authorizing drawings up to theequivalent of $27 million. It was intended to sup-port a program designed to restore monetarystability and conditions of growth for the economy.



TABLE 30. PURCHASES OF CURRENCIES FROM THE FUND, FISCAL YEAR ENDED APRIL 30, 1968


UnderMember Stand-By

Purchasing Arrangements

AfghanistanBoliviaBurmaBurundiCanada

CeylonChileColombiaCosta RicaEl Salvador

FinlandGhanaGuatemalaHaitiIceland

IndiaIndonesiaIranIraqLiberia

MaliNew ZealandNigeriaPeruPhilippines

RwandaSierra LeoneSomaliaSudanSyrian Arab Republic

TunisiaTurkeyUnited Arab RepublicUnited StatesUruguayYugoslavia

Total

2.0012.00

4.00

19.0035.60

2.755.00

38.7525.00

3.75

16.00

4.05

3.0060.00

42.5055.00

2.003.406.50

19.00

12.5024.00

45.00

440.80

Under Decisionon Compensatory

Financing

7.50

19.30

1.901

6.25 a

2.303.75

90.00

17.50 2

29.20

9.50

23.00

9.50

219.70

In ConnectionWith Quota Other

Increase Under PurchaseFirst Resolution Transactions Total

2.0012.00

7.50 15.004.00

391.00 391.00

19.306.25 25.25

37.502.755.00

38.7525.0010.002.303.75

90.0016.00

31.25 31.252.50 20.00

4.05

3.0089.20

9.25 9.2542.5055.00

2.003.406.50

19.009.50

12.5024.00

40.00 63.00200.00 200.00

9.5045.00

6.25 681.50 1,348.251 Reclassified from purchases under stand-by arrangements.2 Reclassified from other purchase transactions.

No drawings were made under this arrangementduring the fiscal year.

El Salvador. The arrangement for El Salvador,approved in December 1967, authorized drawingsup to the equivalent of $10 million. The arrange-ment was to assist efforts by national authorities torestore equilibrium in the country's balance ofpayments by providing a secondary line of re-serves. A drawing of $5 million was made underthis arrangement during the fiscal year.

Honduras. The stand-by arrangement for Hon-duras, which became effective in January 1968,authorized purchases up to the equivalent of $11million to provide a secondary line of reserves

available in the event of temporary balance ofpayments difficulties. No drawings took place dur-ing the balance of the fiscal year.

Indonesia. An arrangement for Indonesia, thefirst after the member rejoined the Fund in Febru-ary 1967, was approved in February 1968. Itauthorized drawings up to $51.75 million to sup-port a program designed to stabilize and rehabili-tate the country's economy. An amount equivalentto $16 million had been drawn by the end of thefiscal year.

Mali. In August 1967 the Fund approved astand-by arrangement authorizing Mali to draw upto the equivalent of $6.5 million. The arrangement



TABLE 31. FUND STAND-BY ARRANGEMENTS FOR MEMBERS, FISCAL YEAR ENDED APRIL 30, 1968


Member

AfghanistanArgentina

Bolivia

Brazil

Burundi

CeylonChileColombia

Congo, Dem. Rep.Costa RicaEcuadorEl SalvadorFinlandGhana

Guatemala

Guyana

HaitiHondurasIndonesiaKorea

Liberia

MaliMorocco

New ZealandNicaraguaParaguay

PeruPhilippines

Rwanda

Sierra Leone

Somalia

Sudan

Tunisia

Turkey

United KingdomUruguay

Yugoslavia

Total

Date ofInception

Aug. 3, 1966May 1, 1967Apr. 15,1968Dec. 2, 1966Dec. 2, 1967Feb. 13, 1967Apr. 29, 1968Mar. 28, 1967Mar. 28, 1968June 15, 1966Mar. 1, 1968Apr. 15, 1967Apr. 19, 1968July 6, 1967Aug. 17,1967July 15, 1966Dec. 5, 1967Mar. 6, 1967May 17, 1966May 25, 1967Apr. 1, 1967Apr. 16, 1968Feb. 15, 1967Feb. 15, 1968Oct. 1, 1966Jan. 1, 1968Feb. 19, 1968Mar. 22, 1967Apr. 11,1968June 1, 1966June 1, 1967Aug. 21, 1967Sept. 23, 1966Oct. 27, 1967Oct. 25, 1967Mar. 1, 1968Sept. 1, 1966Jan. 1, 1968Aug. 18, 1967Jan. 5, 1967Mar. 27, 1968Apr. 20,1967Apr. 20,1968Nov. 1, 1966Jan. 17, 1968Jan. 19, 1967Jan. 19, 1968Sept. 22, 1966Sept. 14, 1967Dec. 5, 1966Dec. 27, 1967Feb. 15, 1967Apr. 1, 1968Nov. 30, 1967June 9, 1966Mar. 1, 1968Jan. 1, 1967

Date ofExpiration

Aug. 2, 1967Apr. 30, 1968Apr. 14, 1969Dec. 1, 1967Dec. 1, 1968Feb. 12, 1968Apr. 28,1969Mar. 27, 1968Mar. 27, 1969June 14, 1967Feb. 28, 1969Apr. 14, 1968Apr. 18, 1969July 5, 1968Aug. 16, 1968July 14, 1967Dec. 4, 1968Mar. 5, 1968May 16, 1967May 24, 1968Mar. 31, 1968Apr. 15, 1969Feb. 14, 1968Feb. 14,1969Sept. 30, 1967Dec. 31, 1968Feb. 18, 1969Mar. 21, 1968Apr. 10, 1969May 31,1967May 31,1968Aug. 20, 1968Sept. 22, 1967Oct. 26, 1968Oct. 24, 1968Feb. 28, 1969Aug. 31,1967Dec. 31,1968Aug. 17, 1968Jan. 4, 1968Mar. 26, 1969Apr. 19,1968Apr. 19, 1969Oct. 31,1967Jan. 16, 1969Jan. 18,1968Jan. 18, 1969Sept. 21, 1967Sept. 13, 1968Dec. 4, 1967Dec. 26, 1968Dec. 31, 1967Dec. 31,1968Nov. 29, 1968June 8, 1967Feb. 28, 1969Dec. 31, 1967

Amount

8.00125.00 x

125.0018.0020.0030.0087.506.006.00

25.0046.0060.0033.5027.0015.5013.0010.0093.7536.4025.0013.4010.007.504.004.00

11.0051.7518.0025.006.004.406.50

50.0050.0087.0019.007.508.00

42.5055.0027.50

2.003.007.503.605.007.00

28.50 3

10.009.609.61

27.0027.00

1,400.0015.0025.0045.00

New orRenewed in

1967/68

125.00125.00

—20.00

87.50—

6.00—

46.00—

33.5027.0015.50

—10.00

—25.00

—10.00

—4.00

—11.0051.75

—25.00—

4.406.50

—50.0087.0019.00

—8.00

42.50—

27.50

—3.00—

3.60

7.00—

10.00—9.61—

27.001,400.00

—25.00

—

2,352.36

AmountNot Drawn

April 30, 1968

—125.00—8.00

87.50—

2.00—

27.00—

33.5027.0012.75

—5.00

———

10.00—4.00—

11.0035.75

—25.00

—1.103.50

—50.0027.0019.00

—8.00

—27.50

—3.00—3.60

5.50 2

—

——4.11

—27.001,400.00

—25.00—

2,017.811 Canceled by Argentina on April 14, 1968.2 Stand-by augmented $1 million by repurchase.3 Canceled by the Sudan on September 13, 1967.



was intended to support the efforts of the Malianauthorities to improve the country's balance ofpayments position and to provide a secondary lineof reserves during the implementation of thestabilization program designed to achieve internaland external equilibrium. Drawings under thisarrangement totaled $3 million by April 30, 1968.

New Zealand. A stand-by arrangement for NewZealand, the first for this member, was approved inOctober 1967. It authorized drawings up to theequivalent of $87 million to support efforts by thenational authorities to strengthen New Zealand'sbalance of payments position. The equivalent of$60 million was drawn under this arrangementduring the fiscal year.

Nicaragua. An arrangement for Nicaragua,which became effective in March 1968, author-ized drawings up to $19 million. It was designedto support a program aimed at restoring equilib-rium in Nicaragua's payments position. No draw-ings under this arrangement were made during thefiscal year.

United Kingdom. In November 1967 the Fundapproved a stand-by arrangement for the UnitedKingdom authorizing drawings up to the equiva-lent of $1,400 million. The arrangement was in-tended to assist the U.K. authorities in establishingconfidence in the new parity for sterling, which,together with the fiscal, credit, and other measures,was expected to form the basis for a major im-provement in the balance of payments position.No drawings under this arrangement had takenplace by April 30, 1968.4

Stand-by arrangements approved during thefiscal year for Bolivia, Brazil, Burundi, Colombia,Costa Rica, Ghana, Guatemala, Guyana, Korea,Liberia, Morocco, Paraguay, Peru, the Philippines,Rwanda, Sierra Leone, Somalia, the Sudan, Tu-nisia, Turkey, and Uruguay provided financialsupport that the Fund had also made available tothese members in the form of stand-by arrange-ments in the preceding year; those for Colombia,Ghana, Guatemala, Guyana, Liberia, the Philip-pines, Sierra Leone, and the Sudan were forsmaller amounts; those for Bolivia, Brazil, Costa

4 On June 19, 1968 the United Kingdom drew the fullamount under the stand-by arrangement, the equivalentof $1,400 million. In addition, under the arrangementsfor which particulars are given in the text, Indonesiadrew the equivalent of $16 million and Nicaragua theequivalent of $10 million between May 1 and June 30,1968.

Rica, Korea, Paraguay, Peru, Rwanda, Somalia,Tunisia, and Uruguay were for larger amounts;and arrangements for Burundi, Morocco, andTurkey were authorized for the same amounts.

All stand-by arrangements approved during theyear were for a period of one year except that forTurkey, which was for nine months.

Compensatory Financing of Export Fluctuations

The data presented in Table 32 indicate a strik-ing growth in the use made by members of thefacility for compensatory financing of export fluc-

TABLE 32. USE OF FUND RESOURCES UNDER THE DECISIONON COMPENSATORY FINANCING OF EXPORT FLUCTUATIONS,

FISCAL YEARS ENDED APRIL 30, 1967 AND 1968


MemberDate ofDrawing

Amount ofDrawing

Fiscal year 1966/67Dominican RepublicGhanaCeylonColombia

Total

Fiscal year 1967/68New ZealandHaiti

Syrian Arab RepublicBurmaIcelandIraqIndiaGuatemalaUruguayUnited Arab RepublicCeylonColombia

Total

Dec. 1966Dec. 1966Mar. 1967Mar. 1967

6.6017.2519.5018.90

62.25

May 1967Aug. 1967Dec. 1967Sept. 1967Nov. 1967Nov. 1967Nov. 1967Dec. 1967Feb. 1968Feb. 1968Mar. 1968Apr. 1968Apr. 1968

29.201.301.009.507.503.7517.5090.006.259.5023.0019.301.90

219.70

L Reclassification.

tuations during the past fiscal year, the first fullyear of operations under the relevant Decision asamended in September 1966.r> Drawings under theDecision by nine members amounted to $194million. One member availed itself of the extensionof drawing limits from 25 per cent to 50 per centof quota provided for in the amended Decision. Inaddition, three members took advantage of theprovision permitting reclassification of part or allof other drawings as drawings under the facilitywhen the requirements for a compensatory draw-

•r> See Annual Report, 1967, pages 131-32 and 159-61.

1

1

1



ing of the same amount are met at the time of thereclassification. Taking into account reclassifieddrawings, the total use of Fund resources under theDecision amounted to $220 million. This compareswith drawings of $62 million by four membersduring the seven months of fiscal year 1966/67when the provisions of the amended Decisionwere applicable, and the rather infrequent use,amounting to three drawings totaling $87 million,made in the previous three and a half years.

Primary exporting countries in 1967-68 wereaffected by a decline in the general level of com-modity prices. Depressed conditions in exportsectors were attributable to pronounced decreasesin prices for agricultural raw materials, while atthe same time the general slackening of economicgrowth in major importing countries and stockadjustments by importers in reaction to high inter-est rates prevented any significant increase in thevolume of demand for many commodities. De-mand factors were not, however, the only cause ofexport shortfalls. The facility proved useful toseveral members whose capacity to export wasadversely influenced by crop conditions, disloca-tions in transport or other export servicing indus-tries, or the repercussions of the Middle East crisis.Another factor which contributed to export short-falls was the temporary lag in an expansion of thevolume of export shipments following currencydevaluations, which reduced export prices in termsof U.S. dollars.

In the period under review, experience has beengained by the Fund and by members in the use ofthe facility as amended in September 1966. Inaddition to the employment of the reclassificationprocedure noted, members have also continued tomake use of stand-by arrangements to mitigatebalance of payments difficulties arising in partfrom commodity problems. Procedures were there-fore elaborated for the avoidance of "doublecompensation," where members make use ofother Fund resources in circumstances whicheventually lead to recourse to the compensatoryfinancing facility.

Waivers

Any drawing or stand-by arrangement thatwould increase the Fund's holdings of a member'scurrency by more than 25 per cent of its quotawithin any 12-month period (except to the extent

that the Fund's holdings of the member's currencyare less than 75 per cent of its quota) requires awaiver under Article V, Section 4, of the Articlesof Agreement. During the fiscal year four pur-chases of currencies required waivers for thispurpose: the purchases by Burma and Iraq; andtwo purchases by the United Arab Republic, oneof which was under the Compensatory FinancingDecision. Waivers were also required for all stand-by arrangements approved during the fiscal year,except for those for Brazil, Indonesia, Rwanda,and Turkey.

A waiver is also required for any drawing orstand-by arrangement, the use of which wouldincrease the level of the Fund's holdings of a mem-ber's currency to more than 200 per cent of itsquota. In 1967/68 a waiver for this purpose wasgranted to Ceylon, whose drawing equivalent to$19.3 million under the Compensatory FinancingDecision brought the Fund's holdings of the mem-ber's currency to approximately 205 per cent ofits quota.

Repurchases

During the fiscal year 1967/68, total repur-chases made by 40 members amounted to theequivalent of $1,116 million. This represents thelargest amount repurchased in any fiscal year sinceApril 30, 1962. Sixty-three per cent of thisamount, the equivalent of $705 million, representsrepurchases made in respect of drawings understand-by arrangements; the equivalent of $6 mil-lion was repurchased before the expiration of oneyear, $6 million at the expiration of two years, andthe remainder of $693 million before or at theexpiration of three years from the date of pur-chase. Of the last amount the equivalent of $655million was in respect of two repurchases made bythe United Kingdom, the equivalent of $405 mil-lion in May 1967 (when the Fund repaid the sameamount, which it had borrowed under the GeneralArrangements to Borrow) and the equivalent of$250 million in November 1967. These repur-chases, together with sales of sterling to othermembers, completely reversed the drawing of theequivalent of $1,000 million which the UnitedKingdom had made in December 1964.

The equivalent of $259 million was repurchasedin accordance with schedules agreed by the Execu-tive Directors which provided for repurchase



within five years from the date of the drawing.Voluntary repurchases made by five membersin accordance with Executive Board DecisionNo. 648 amounted to the equivalent of $46 million.Two of these members repurchased the Fund'sholdings of their currencies on subscription ac-count, thereby increasing their gold tranche posi-tions, and the other three members repurchasedin respect of gold tranche drawings. Furthermore,the equivalent of $16 million was repurchased asfirst, second, and third installments, reversingdrawings made in connection with quota increases.Three members repurchased the equivalent of $64million in respect of other drawings in the firstcredit tranche.

Total repurchases also included the equivalentof $26 million discharging obligations incurredunder Article V, Section 7(6), of the Fund Agree-ment. This Article provides that, subject to certainlimitations, a member shall repurchase annually anamount of the Fund's holdings of its currency inexcess of 75 per cent of its quota, equivalent to onehalf of any increase in the Fund's holdings of itscurrency that has occurred during the Fund'sfinancial year, plus or minus one half of any in-crease or decrease in its monetary reserves duringthe same period.

Table 33 lists repurchases of currencies from theFund during the fiscal year ended April 30, 1968.

The Executive Directors agreed to the requestsof 13 members to schedule their repurchases overperiods up to five years from the date of purchase.The Directors also agreed to one member's requestfor postponement of the discharge of its repur-chase obligations, incurred under Article V, Sec-tion 7(6), of the Fund Agreement, to coincidewith scheduled repurchases. Discussions with onemember that had not repurchased at the agreeddates in 1966/67 have been successfully com-pleted, and the member is meeting its currentrepurchase commitments in accordance with theagreed schedule.

Currency Composition of Drawings, Repaymentof Borrowings, and Repurchases

During the fiscal year 1967/68 the Fund sold19 members' currencies to other members of theFund. These included the currencies of Irelandand South Africa which were drawn for the firsttime. Since the Fund's holdings of Argentine pesos,

Brazilian new cruzeiros, Irish pounds, poundssterling, and U.S. dollars were above 75 per centof these members' quotas, sales of these currenciesreduced the amounts to be repurchased by themembers.

TABLE 33. REPURCHASES OF CURRENCIES FROM THE FUND,FISCAL YEAR ENDED APRIL 30, 1968

(7/i millions of U.S. dollars)

MemberRepurchasing

AfghanistanArgentinaBrazilBurundiChileColombiaCongo, Dem. Rep. ofCosta RicaCyprusDominican RepublicEcuadorEl SalvadorGhanaGuatemalaHaitiHondurasIndiaIndonesiaIranIraqIrelandLiberiaMalaysiaMaliNew ZealandNicaraguaPakistanPanamaRwandaSomaliaSudanSyrian Arab RepublicTanzaniaTunisiaTurkeyUnited Arab RepublicUnited KingdomUruguayYugoslaviaZambia

Total

Amount

4.2934.00

6.975.19

26.0035.00

8.122.751.164.503.255.024.650.351.592.25

57.5016.3414.0239.96

8.693.20i2.95

35.005.651.900.103.008.688.556.420.05

11.8219.0653.20

654.845.00

11.503.00

1,115.511 Less than $5,000.

Table 34 shows a summary of purchases andrepurchases during the year ended April 30, 1968,classified by currencies used. The drawings byCanada and the United States equivalent to $391million and $200 million, respectively, as well asrepurchases discharging obligations incurred underArticle V, Section 7(6), of the Articles of Agree-ment and the repurchases by the United Kingdom,



TABLE 34. DRAWINGS AND REPURCHASES BY CURRENCY, FISCAL YEAR ENDED APRIL 30, 1968


Drawings

Currency

GoldArgentine pesosAustralian dollarsAustrian schillingsBelgian francsBrazilian new cruzeirosCanadian dollarsDanish kronerDeutsche markFrench francsIrish poundsItalian lireJapanese yenMexican pesosNetherlands guildersNorwegian kronerPeruvian solesSouth African randSwedish kronerPounds sterlingU.S. dollars

Total

Canada

—19.09.0

27.0

———60.0

32.0—

23.0—9.0

27.0

——

——185.0

391.0

UnitedStates

—

——15.0

———35.0——

50.0——

100.0

——

———

200.0

Othercountries

30.534.223.528.010.010.05.0

106.473.522.528.00.54.0

23.718.8

—20.015.0

151.8152.0

757.3

Total

30.553.232.570.010.010.05.0

201.4105.522.5

101.00.5

13.0150.7

18.8—20.0

15.0151.8337.0

1,348.3

UnderArticle V,

Section 7(b) a

21.5——0.40.5

— 2

2.60.5

—0.6—

2

0.3

— 2

0.1——

26.5

Repurchases

UnitedKingdom

_

—10.0—47.0

—30.010.0

231.8145.0

—45.040.0

—56.010.0

30.0

—

654.8

Other

2.7—16.8

16.934.9

19.02.1

94.381.5

—91.319.13.4

39.4

12.9

—

434.2

Total

24.1—26.8

17.382.3

49.012.1

328.7227.0 3

—136.959.1

3.495.710.0

2

43.0

—

1,115.5

1 Including discharges of repurchase obligations incurred in previous years.2 Less than $50,000.3 In addition the equivalent of $2.5 million was received from the withdrawing member.

are presented in separate columns. Table 35classifies by currencies used the repayments ofborrowings under the General Arrangements toBorrow (GAB) during the fiscal year. The repay-

TABLE 35. REPAYMENTS BY CURRENCY UNDER THEGENERAL ARRANGEMENTS TO BORROW,FISCAL YEAR ENDED APRIL 30, 1968 a


Date of Repayment

Currency May 25, 1967 February 28, 1968

Australian dollarsAustrian schillingsBelgian francsCanadian dollarsDeutsche markFrench francsItalian lireJapanese yenMexican pesosNetherlands guildersSwedish kronorU.S. dollars

Total

_—3015

180100

520—4015—

405

113

—532

—13

—16

35

ments totaling the equivalent of $405 million inMay 1967 were to eight GAB participants in theirown currencies; that of $35 million in February1968 was to Canada.6

Repurchases in Italian lire exceeded purchasesand repayment of borrowings in that currency, butthe Fund's holdings of Italian lire at 9 per cent ofItaly's quota on April 30, 1968 were again at thelowest level of the Fund's holdings of any cur-rency, in terms of percentage of the member'squota. The highest level of holdings on the samedate was that of Ceylon rupees, equivalent to 205per cent of the member's quota.

In accordance with the Decision of the Execu-tive Directors regarding Currencies to Be Drawnand to Be Used in Repurchases, adopted onJuly 20, 1962, members are required to consultwith the Managing Director on currencies to bedrawn and to be used in repurchase.7 The Manag-ing Director bases his advice on consultations withExecutive Directors representing members whose

1 The repayments in May 1967 were to eight GABparticipants in their own currencies; that in February1968 was to Canada.

6 Further detail on the General Arrangements to Bor-row is given on pages 107-108, below.

7 See Annual Report, 1962, pages 36-41.



currencies could be used. These consultations takeplace at the end of each quarter of the Fund'sfiscal year. An estimated target distribution ofcurrencies to be used in drawings and repurchases,based on the Fund's anticipated requirements dur-ing a three-month period, serves as a guide. Largedrawings and repurchases are not included in thequarterly target distribution; for these, the Man-aging Director consults with Executive Directorsconcerned on the currencies to be used wheneverthe need arises. In selecting currencies for draw-ings, account is taken of the balance of paymentsand reserve positions of the members whose cur-rencies are considered for use, as well as of thelevel of the Fund's holdings of their currencies.

TABLE 36. SUMMARY OF FUND TRANSACTIONS,FISCAL YEARS ENDED APRIL 30, 1948-68


194819491950195119521953195419551956195719581959196019611962196319641965196619671968

Total

TotalPurchases

byMembers

606.04119.4451.8028.0046.2566.12

231.2948.7538.75

1,114.05665.73263.52165.53577.00

2,243.20579.97625.90

1,897.442,817.291,061.281,348.25

14,595.60 l

AmountsNot Drawn

Under Stand-ByArrangements

in Effectat End of

Fiscal Year

—

—53.0090.0090.0097.50

968.90884.28

1,132.84291.88338.62

1,942.881,287.251,970.15

516.15421.04401.55

2,017.81

TotalRepurchases

byMembers

—24.2119.0936.58

184.96145.11276.28271.66

75.0486.81

537.32522.41658.60

1,260.00807.25380.41516.97406.00340.12

1,115.51

7,664.3 1 2

1 Includes purchases that raised the level of the Fund'sholdings of the drawing members' currencies to no morethan 75 per cent of quota. These drawings are not subjectto repurchase.

2 Includes repurchases that reduced the Fund's hold-ings of members' currencies below the amounts originallypaid on subscription account and repurchases of mem-bers' currencies paid in settlement of charges. Excludessales of currencies of members held by the Fund inexcess of 75 per cent of quota, as a result of previousdrawings, and adjustments due primarily to settlement ofaccounts with countries that have withdrawn from theFund; these sales and adjustments have the effect ofrepurchases.

The range of currencies to be used in repurchaseis limited to those currencies that are convertiblepursuant to Article VIII of the Fund Agreementand of which the Fund's holdings are below 75per cent of the countries' quotas. In the selectionof currencies for drawings and repurchases, anendeavor is made to equalize the ratios of a mem-ber's reserves position in the Fund to its holdingsof gold and foreign exchange. During fiscal year1967/68, 19 currencies were used in drawings (asnoted above) and 14 currencies in repurchases.

Summary of Transactions, 1948-68

From the beginning of Fund operations toApril 30, 1968, 65 members purchased currenciesfrom the Fund; in addition, 5 members weregranted a total of nine stand-by arrangements butdid not make purchases under them. Total salesof currencies by the Fund amounted to the equiva-lent of $14.6 billion. Total purchases, stand-by ar-rangements in effect at the end of each fiscal year,and repurchases are summarized in Table 36.Drawings outstanding as of April 30 of each yearand amounts not drawn under stand-by arrange-ments in effect on the same date are shown inChart 27.

Drawings made by 60 members have been fullyor partly repaid, either through repurchases in goldand convertible currencies or as a result of pur-chases of their currencies by other members. OnApril 30, 1968 the total amount of members'purchases still outstanding was equivalent to $4.6billion. On that date the amounts drawn had beenoutstanding for the following periods:

12 months or less13 to 18 months19 to 24 months25 to 30 months31 to 36 months37 to 42 months43 to 48 months49 to 54 months55 to 60 months

Fund Charges and Interest Payments

As of April 30, 1968, 32 members were payingthe charges levied by the Fund on its holdings oftheir currencies in excess of their quotas. The totalof these charges incurred during the year amounted

Amount inmillions ofU.S. dollars

1,121.1339.7621.7550.8

1,640.1199.855.8

8.023.0

Number ofmembersinvolved

351619251611825



CHART 27. OUTSTANDING DRAWINGS FROM THE FUND AND AMOUNTS NOT DRAWN UNDEREXISTING STAND-BY ARRANGEMENTS, ON APRIL 30, 1948-68


_!/ Belgium, Canada, Denmark, France, Italy, Japan, Netherlands, and Norway.



to the equivalent of $82 million, of which theequivalent of $61 million was paid in members'own currencies and the remainder in gold. Duringthe preceding year similar charges amounted to theequivalent of $83 million. Since the beginning ofthe Fund's operations, 55 members have beensubject to such charges. During the fiscal year1967/68, 7 members paid all or part of thesecharges in their own currencies in accordancewith Article V, Section 8(/), of the Fund Agree-ment. These provisions permit such payments ifthe member's monetary reserves are less than halfof its quota. The present schedule of charges to belevied on the Fund's holdings of a member's cur-rency exceeding its quota has been in effect sinceMay 1, 1963. A Decision taken by the ExecutiveDirectors in April 1966 provides for an annualreview of the schedule of charges. Accordingly, thepresent schedule of charges was reviewed by theExecutive Directors in April 1968 and continuesto be in effect. The schedule is reproduced in eachissue of International Financial Statistics.

Service charges on drawings amounted to a totalof $7 million for the fiscal year ended April 30,1968, compared with $5 million during 1966/67.Charges collected on stand-by arrangementstotaled $5 million during the year under review;similar receipts in 1966/67 amounted to $0.9million. These totals represent stand-by chargescollected after deductions of amounts creditedagainst service charges in the event of drawingsunder the stand-by arrangements and of refundsresulting from changes in the level of the Fund'sholdings of members' currencies that restored orincreased the members' gold tranche. Thesecharges are considered income only after the ex-piration or cancellation of the stand-by arrange-ment; the income derived from them in the fiscalyear under review amounted to $0.6 million, thesame amount as in 1966/67.

The Fund's interest payments in gold in accord-ance with paragraph 3(b) of the loan agreementwith Italy8 and paragraph 9(b) of the GeneralArrangements to Borrow amounted to a total of$12 million, compared with $17 million during1966/67. The decrease was due mainly to therepayment by the Fund of the equivalent of $405million in May 1967 in connection with the UnitedKingdom's repurchase of sterling from the Fund.

Replenishment of Fund's Holdings of Currencies

From time to time the Fund has replenished itsresources by selling gold or by borrowing curren-cies from its members in accordance with theprovisions of Article VII of the Fund Agreement.No gold sales were made during the fiscal year1967/68. However, in connection with the No-vember 1967 stand-by arrangement for the UnitedKingdom, authorizing drawings up to the equiva-lent of $1,400 million, the Executive Directorsapproved the sale of gold up to the equivalent of$400 million at such time as drawings actuallywould take place.9

The General Arrangements to Borrow (GAB),which enabled the Fund to supplement its re-sources by borrowing up to $6 billion in curren-cies of ten industrial member countries (Belgium,Canada, France, Germany, Italy, Japan, theNetherlands, Sweden, the United Kingdom, and theUnited States) first went into effect on October 24,1962, for a four-year term. On October 15,1965 the Executive Directors approved a four-yearrenewal of these arrangements, which will bereviewed in the light of further experience prior toOctober 1968. In connection with drawings by theUnited Kingdom in December 1964 and May1965, equivalent to $1,000 million and $1,400million, respectively, the Fund borrowed theequivalents of $405 million and $525 millionunder the provisions of the GAB. In May 1967,when the United Kingdom repurchased the equiva-lent of $405 million, the Fund repaid the amountsborrowed in December 1964. Furthermore, at therequest of Canada, the Fund repaid its indebted-ness to this country in the equivalent of $35 millionin February 1968. On the other hand, thevalue of the credit arrangement with the UnitedKingdom was reduced by 14.3 per cent, to theequivalent of $857 million, as a result of thedevaluation of sterling in November 1967. Thesechanges brought about a net increase equivalent to$297 million in the amount not borrowed underthe GAB, from the equivalent of $5,070 millionon April 30, 1967 to the equivalent of $5,367

8 See Annual Report, 1967, page 50.

9 When the United Kingdom drew the full amountunder the stand-by in June 1968, the Fund sold goldequivalent to $365 million to 12 member countries inexchange for their currencies. On the occasion of thedrawing by France equivalent to $745 million duringthe same month, gold equivalent to $182 million wassimilarly sold to 11 members.



million on April 30, 1968. In connection with thestand-by arrangement for the United Kingdomauthorizing drawings up to $1,400 million, agreedin November 1967, the Executive Directors ap-proved a proposal for future calls under the GABfor the equivalent of $525 million.10

In June 1964 the Fund entered into an agree-ment with Switzerland which associated that coun-try with the Fund's General Arrangements toBorrow. Under this agreement Switzerland under-took to give support directly to any participant inthe GAB for whose benefit the Arrangements areactivated, provided that the participant had en-tered into a bilateral implementing arrangementfor that purpose with Switzerland. The total finan-cial assistance under these arrangements outstand-ing at any one time was not to exceed the equiva-lent of $200 million. On November 22, 1967 theagreement was extended until October 23, 1970.At the time of the U.K. drawings equivalent to$1,000 million in December 1964 and equivalentto $1,400 million in May 1965, Switzerland madeavailable to the United Kingdom the equivalent of$80 million and $40 million, respectively. Theformer amount was repaid by the United Kingdomin May 1967.

Consultations with Members

Member countries that are availing themselvesof the transitional arrangements of Article XIV,Section 2, of the Fund Agreement are required bythat Article to consult with the Fund annually onthe retention of their exchange restrictions. Duringthe fiscal year 1967/68, 50 such consultationswere completed with 48 countries; with others theprocedures had been initiated but had not beencompleted by the end of the fiscal year. Theseconsultations have continued to provide oppor-tunities for the examination of the economic andfinancial problems of the members and of theirefforts to reduce and simplify exchange restric-tions. Again, several of the consultations underArticle XIV have been combined with discussions

30 When the drawing took place in June 1968, theequivalent to $476 million was borrowed from five coun-tries under the GAB. In connection with the drawing byFrance, the equivalent of $265 million was borrowedfrom the same countries. Further, the Fund consented toa proposal by France to transfer its GAB claim on theFund, equivalent to $140 million, to four other partici-pants in the Arrangements.

of new financial programs or have included re-views of such programs already being imple-mented.

Consultations were also held with 19 membersthat have accepted the obligations of Article VIII,Sections 2, 3, and 4, of the Fund Agreement.Executive Board Decision No. 1034-(60/27) ofJune 1, I96011 stressed the merit of holding peri-odic discussions between the Fund and its memberseven if no question involving action under ArticleVIII should arise. These discussions include ex-changes of views on monetary and financial devel-opments and enable the Fund to further the objec-tive of securing the fullest possible degree ofcollaboration on international monetary problems.

Technical Cooperation

The Fund has continued to maintain a broadand flexible technical assistance program, whichduring the past fiscal year has provided the Fund'smembers with technical aid on an increasing scalein fields that are closely related to the work of theFund. The programs carried on during the yearhave again covered advice on the preparation andcarrying out of monetary, exchange, and fiscalpolicies, the improvement of fiscal systems, thedrafting of central banking legislation, the organi-zation and operational development of centralbanks, the reform of banking and credit systems,and the development of financial and balance ofpayments statistics. The Fund has also continuedto send representatives to a number of countriesto assist them in the implementation of programsrelated to stand-by arrangements. The greater partof the technical assistance program has been pro-vided through the Fund's Central Banking Serviceand Fiscal Affairs Department, which were bothestablished in 1964 for the specific purpose ofmeeting the mounting number of requests frommembers, particularly newly independent coun-tries, for assistance in the fiscal and banking fields.

During the past year the Fiscal Affairs Depart-ment furnished technical assistance in response to30 requests from 17 countries, with 20 of therequests involving assignments of six months ormore. Some of this assistance was in response torequests received in the previous year. In most

11 Selected Decisions of the Executive Directors andSelected Documents (third issue, Washington, 1965)pages 81-83.



cases assistance was provided by members of thepanel of experts. It covered the fields of tax policy,tax administration, and budgetary problems.

The Central Banking Service staff provided as-sistance to 14 countries on topics ranging fromdiagnostic surveys of central banks, banking sys-tems, and credit problems to the drafting of finan-cial legislation. In addition, during the year theCentral Banking Service arranged for 60 experts toserve—mostly for initial periods of one year—inthe central monetary institutions of 26 countries.In all, some 33 countries received technical assist-ance through the Central Banking Service during1967/68.

As indicated above, only part of the technicalexpertise made available to member countries hasbeen provided from the Fund's own staff. A largenumber of assignments has continued to be under-taken by outside experts with suitable experiencein central banking or in financial or fiscal manage-ment. Although there are some signs that therapid expansion since 1964 is coming to an end,the demand for qualified personnel remains high,and there is clearly a continuing need for technicalassistance for some years to come. The develop-ments outlined above suggest a need for the Fundto maintain a flexibility in its approach, so as to beable to meet the successive problems that seemlikely to emerge as the process of economic devel-opment continues.

The IMF Institute

During the past fiscal year, the IMF Instituteexpanded its activities by adding a course in Span-ish to those given in English and French, bylengthening the duration of some courses, and bypresenting for the first time a course on publicfinance. As a consequence, the Institute is nowrunning two simultaneous courses during most ofthe year.

The main task of the Institute remained thepreparation and presentation of the courses onfinancial analysis and policy. These courses weregiven in English, in French, and in Spanish, andeach lasted four and a half months. The firstcourse, which started on October 9, 1967, wasconducted in French, and was attended by 24officials from 18 member countries, mostly French-speaking African countries. The course which

began on November 20, 1967 was the first courseon financial analysis and policy to be given inSpanish; of the 21 participants, 20 came frommember countries in the Western Hemisphere.Both the French and the Spanish courses closelyfollowed the outline of the English course whichended in July 1966. The third course, which beganon March 11, 1968, was given in English to 24participants from 23 member countries. Thecourses on financial analysis and policy focus onthe elaboration and implementation of appropriatemonetary, fiscal, and balance of payments policies,with special emphasis on developing countries.These courses draw extensively on the experiencegained by the Fund in its contacts with membercountries.

In addition, the Institute organized in 1967/68two eight-week courses on balance of paymentsmethodology, one in French, from September 11to November 3, 1967, and the other in English,from April 15 to June 7, 1968. Each of thesecourses, which describe the principles and methodsof compiling balance of payments statistics, wasgiven in cooperation with the Fund's Balance ofPayments Division. The new course on publicfinance lasted from May 15 to July 7, 1967 andwas given in English with the collaboration of theFiscal Affairs Department. It presented 20 partici-pants with a survey of the field of public finance,with emphasis on the problems of developingcountries.

The Institute plans to present five courses inthe period September 1968 to June 1969: thethree courses on financial analysis and policy inEnglish, French, and Spanish; a course, in English,on balance of payments methodology; and anextended ten-week course, also in English, onpublic finance.

Relations with Other InternationalOrganizations

The Fund's continuing relations with otherinternational and regional organizations on mattersof common interest are reflected not only in directworking cooperation with their staffs and theexchange of appropriate information and docu-ments but also in attendance by Fund staff atmeetings of many of those organizations, both atthe plenary level and at the committee, seminar,



and working group level. In turn, these, and other,organizations were represented at the Fund's An-nual Meeting, held jointly with that of the Inter-national Bank for Reconstruction and Develop-ment (IBRD) in Rio de Janeiro in September1967.

Aside from the IBRD, with which the Fund hasa special relationship, the Fund maintained closerelations with the United Nations and its relevantorgans, including the General Assembly, the Eco-nomic and Social Council (ECOSOC), the re-gional Economic Commissions, and other sub-sidiary bodies. At the request of a number ofdelegations, the Managing Director addressed theForty-Third Session of the ECOSOC in July 1967;at the resumed session in November, he presentedthe Annual Report of the Fund. The ManagingDirector is a member of the Administrative Com-mittee on Coordination, and staff members partici-pated in the activities of its subcommitteesand working groups. The Fund participated inthe work of the Second Session of the UnitedNations Conference on Trade and Development(UNCTAD) held in New Delhi in February andMarch 1968. Considerable interest was expressedin the study being undertaken by the Fund and theIBRD, in response to the Resolutions adopted bytheir respective Boards of Governors in Rio deJaneiro on the stabilization of prices of primaryproducts. Prior to the UNCTAD Conference, amission representing a group of developing coun-tries ("Group of 77") had met in December 1967with the Managing Director and members of thestaff of the Fund in Washington and had presentedfor information the "Charter of Algiers," contain-ing the developing countries' program for actionat the Conference.

In the field of publications covered in the finalsection of this Note, the Fund staff has initiated arevision of the Balance of Payments Manual,partly with the object of achieving concordancebetween the Manual and the recently revisedUnited Nations system of national accounts. Inthis task the Fund is working closely with thesecretariat of the United Nations.

Outside the UN family of agencies, the Fundhas also maintained close relations with the CON-TRACTING PARTIES to the General Agreement onTariffs and Trade (GATT); the Bank for Inter-national Settlements; the Organization for Eco-

nomic Cooperation and Development (OECD),including its Economic Policy Committee andworking parties, Economic Development and Re-view Committee, Development Assistance Com-mittee, Board of Management of the EuropeanMonetary Agreement, and Committee on InvisibleTransactions, with which the Fund is participatingin a continuing study on the improvement of capi-tal markets; the Organization of American States,particularly its Inter-American Economic andSocial Council and Inter-American Committee onthe Alliance for Progress (CIAP), in connectionwith CIAP's country reviews and other matters ofmutual concern; and the African, Asian, and Inter-American Development Banks. In the field ofcommodities, staff members attended meetings ofinternational bodies concerned with rubber, wheat,and cocoa.

In connection with the discussions on interna-tional liquidity, the Managing Director attendedmeetings of the Ministers and Governors of theGroup of Ten participants in the General Arrange-ments to Borrow, in London in July and August1967 and in Stockholm in March 1968, the meet-ing of the OECD Ministerial Council in Paris inDecember 1967, and participated in discussionswith officials at the Bank for International Settle-ments in Basle.

As in previous years, the CONTRACTING PARTIESto the GATT consulted with the Fund in connec-tion with their consideration of import restrictionsand import surcharges maintained for balance ofpayments reasons by 15 countries. Representativesof the Fund attended the Twenty-Fourth Sessionand meetings of various subsidiary bodies of theGATT.

An important phase of the close collaborationbetween the Fund and the IBRD is their reciprocalparticipation in consultative groups and consortiaconvened for the coordination of aid. Fund repre-sentatives attended meetings of consultative andother groups convened by the Bank for certaindeveloping countries and the consortia on Indiaand Pakistan, while Bank representatives, as wellas representatives from the OECD and the UNDevelopment Program, attended the Ghana aidcoordination meetings convened and chaired bythe Fund. The Fund also participated in similarconsultative groups and consortia for particularcountries held by other sponsoring organizations


ACTIVITIES OF THE FUND 1 1 1

or governments, including those sponsored by theOECD and the intergovernmental meetings con-vened by the Netherlands and France with respectto Indonesia. Fund staff members participated inthe third general meeting conducted by the Bankto consider coordination of aid programs, whichwas held in Rio de Janeiro during the joint AnnualMeetings. The two organizations also cooperatedin holding seminars for Brazilian university pro-fessors of economics in Rio de Janeiro just priorto the Annual Meetings.

Staff

At the end of the fiscal year, the Fund staffnumbered 858, compared with 778 a year earlier.In addition there were some on temporary appoint-ment. During the year 174 new staff memberswere appointed from 45 member countries. Na-tionals of 76 countries were on the staff onApril 30, 1968. These figures do not includeAssistants to Executive Directors.

Income, Expenditure, and Reserves

During the fiscal year, the Fund's operatingincome, equivalent to $89,442,756, exceeded itstotal expenditure by $55,743,725. This amountwas transferred provisionally to the General Re-serve pending action by the Board of Governors.The General Reserve totaled $291,267,499 onApril 30, 1968.

The Fund continued to invest a part of its goldholdings in U.S. Government securities, with theguarantee that the same quantity of gold can bereacquired whenever the investment is terminated.The amount so invested was $800 million. Theincome therefrom amounted to $39,750,857 forthe fiscal year; it was credited to a Special Re-serve, which showed a balance of $262,892,557on April 30, 1968.

The administrative budget approved by theExecutive Directors for the period May 1, 1968-April 30, 1969 is presented in Appendix IV.Comparative income and expenditure figures forthe fiscal years 1965/66, 1966/67, and 1967/68are given in Appendix V.

The Executive Directors requested the Govern-

ments of Canada, Ethiopia, and Spain to nominatemembers of the Audit Committee for 1968. Thefollowing nominations were made and confirmed:Mr. George R. Long, Assistant Auditor Generalof Canada; Mr. Teferra Liben, Chief Auditor,Inland Revenue Department of Ethiopia; and Mr.Francisco Estevez Jimenez of the Accounting andAuditing Service of the Ministry of Finance, Spain.The report of the Committee is submitted sepa-rately. Appendix VI gives the Auditors' Certificate,together with the audited Balance Sheet as atApril 30, 1968 and the audited Statement ofIncome and Expenditure for the fiscal year.

Publications

The Fund continued to issue its regular publica-tions in 1967/68. These included Annual Reportof the Executive Directors for the Fiscal YearEnded April 30, 1967, with shortened versions inFrench, German, and Spanish; Eighteenth AnnualReport on Exchange Restrictions; Balance of Pay-ments Yearbook, Volume 19, 1962-66; Interna-tional Financial News Survey, weekly; Interna-tional Financial Statistics (issued in an Englishedition and in a combined English, French, andSpanish edition), monthly, and Supplement to1967/68 Issues; Schedule of Par Values, 44th and45th issues; Staff Papers, Volume XIV, Nos. 2and 3, and Volume XV, No. 1; and SummaryProceedings of the Twenty-Second Annual Meet-ing of the Board of Governors.

In conjunction with the IBRD, the Fund pub-lished Direction of Trade, monthly, with an annualedition 1962-66; and Finance and Development,quarterly (English, French, and Spanish editions).

In April 1968 the Fund published the Report ofthe Executive Directors to the Board of Governorson the Establishment of a Facility Based on SpecialDrawing Rights in the International MonetaryFund and Modifications in the Rules and Practicesof the Fund. This Report, proposing amendmentof the Fund's Articles of Agreement, was alsomade available in unofficial translations in Frenchand Spanish.

During 1967/68, the Fund also published onenew pamphlet, Balance of Payments Concepts andDefinitions, bringing the number of publications in



the Pamphlet Series to ten. All these pamphletsare available, or are being made available, inEnglish, French, and Spanish.

Among other publications in preparation is aseries of surveys of African economies. Thesesurveys will set out basic economic and financialdata on member countries in Africa and provide adescription of the various institutional and otherarrangements for cooperation in the region. Thefirst volume in the new series, dealing with fivecountries in equatorial Africa, will be publishedshortly, in both English and French editions.

The Balance of Payments Yearbook, Interna-tional Financial Statistics (and Supplements),Staff Papers, and Direction of Trade are availableby subscription. The total cost for all four publica-tions is $33.50 a year to general subscribers. Uni-versity libraries, faculty members, and studentsmay subscribe at a reduced rate of $3.00 a year toany one of these publications or $10.00 a year forall four. With the exception of the surveys ofAfrican economies, all other publications of theFund mentioned above are available free ofcharge.


B. Balance of Payments Statements

HE following tables 37-45 present balance ofpayments statements for Belgium-Luxem-

bourg, Canada, France, Germany, Italy, Japan, the

Netherlands, the United Kingdom, and the UnitedStates. Less detailed statements are presented inTable 46 for the primary producing countries.

TABLE 37. BELGIUM-LUXEMBOURG: BALANCE OF PAYMENTS SUMMARY, 1966-FrasT QUARTER 1968 '


1967

A. Goods, Services, and Transfer PaymentsExports 3

Imports 3

Trade balanceServices (net)Transfer payments (net)

Total

Memorandum item: Goods, Services, andPrivate Transfers

B. Long-Term CapitalPrivate 4

Official

Total

C. Total (A plus B)

D. Short-Term Capital, n.i.e. (includingnet errors and omissions)

Treasury short-term certificatesNet errors and omissions

Total

E. Commercial Bank Capital

F. Total (C through E)

G. Official Monetary MovementsIMF accountsForeign exchange (increase — ) r>

Other claims (net)Monetary gold (increase — )

Total

1966

5,648-5,742

-9416

-18

-96

-46

34-82

-48

-144

326

38

140

34

-5810

— 2034

-34

1967

5,992-5,854

138114

-50

202

282

108-102

6

208

-3418

-16

56

248

39-324

— 744

-248

Firstquarter

1,454-1,390

6432

-10

86

100

28-24

4

90

-34— 2

-36

-64

-10

—28

—

10

Secondquarter

1,560-1,504

568

-10

54

68

-20-28

-48

6

-2228

6

94

106

30-142

24

-106

Thirdquarter

1,412-1,384

288

-14

22

44

36-36

—

22

-124

-8

—

14

— 2-100

826

-14

Fourthquarter

1,566-1,576

-1066

-16

40

70

64— 14

50

90

34-12

22

26

138

11-84-99

34

-138

1968^'

Firstquarter

1,574-1,600

-2650

-12

12

42

-48— 16

-64

-52

48

12

-30

-70

-29-10

4762

70

Source: National Bank of Belgium.1 Positive figures are credits; negative figures are debits.2 Preliminary.3 Partly f.o.b.; partly c.i.f.4 Includes short-term capital, appropriate to Group D.5 Includes holdings of nonmarketable U.S. Treasury bonds and notes.

113

T


114

ANNUAL REPORT, 1968

TABLE 38. CANADA: BALANCE OF PAYMENTS SUMMARY, 1966-FiRST QUARTER 1968 '


1967

A. Goods, Services, and Transfer PaymentsExports f .o.b.Imports f .o.b.Nonmonetary gold

Trade balanceInvestment income (net)Other services (net)Transfer payments (net)

Total

1966

9,552-9,344

116

324-751-540-85

-1,052

1967

10,531— 10,087

104

548-803-89-49

-393

Firstquarter

2,413-2,324

30

119-167-213-31

-292

Secondquarter

2,792-2,788

26

30-199-35-25

-229

Thirdquarter

2,500-2,420

24

104-185

26919

207

Fourthquarter

2,826-2,555

24

295-252-110-12

-79

1968

Firstquarter

2,793-2,574

25

244-210-242

—

-208

Memorandum item: Goods, Services, and

B.

C.

D

E.

F.

Private Transfers

Long-Term CapitalDirect investment in CanadaCanadian direct investment abroadTransactions in Canadian securities

New issuesRetirements and other transactions

Transactions in foreign securitiesColumbia River Treaty (net)Other loans by Canadian Government

(net)Other

Total

Total (AplusB)

. Short-Term Capital (includingnet errors and omissions)

Total (CplusD)

Official Monetary MovementsIMF accountsGold and foreign exchange (increase — )Reciprocal swap facility with

U.S. Federal Reserve System

Total

-902

657-19

1,353-686-391

30

-109

943

-109

-223

-332

— 95427

—

332

-229

500-46

1,212-365-322

40

4267

1,282

889

-872

17

15-32

—

-17

-244

116-28

307-110-52

—8

43

284

-8

-4

— 12

-2032

—

12

-759

134-9

274-163-48

—

—50

238

9

-60

-51

1734

—

51

226

130-18

251-37

-115—

-876

279

486

-434

52

-2-50

—

-52

-52

1209

380-55

-10740

—498

481

402

-374

28

20-48

—

-28

-195

5-69

364-145-63

—-8

14

98

—110

-598

— 708

43622

250

708

Source: Dominion Bureau of Statistics.1 Preliminary. Positive figures are credits; negative figures are debits.


BALANCE OF PAYMENTS STATEMENTS 115

TABLE 39. FRANCE: BALANCE OF PAYMENTS SUMMARY, 1967 ]


WithCountries WithOutside FrenchFrench FrancFranc AreaArea Countries

A. Goods, Services, and TransferPayments

Exports f.o.b.Imports f.o.b.Other merchandise


Total

Memorandum item: Goods,Services, and PrivateTransfers

B. Long-Term CapitalPrivate

Assets (increase — )Liabilities

Official

Total

C. Total (AplusB)

D. Short-Term Capital, n.i.e.(including net errorsand omissions)

Private nonmonetaryNet errors and

omissionsMultilateral settlements

Total

E. Commercial Bank CapitalLiabilitiesAssets (increase — )

Total


G. Official Monetary MovementsIMF accountsGold and foreign ex-

change (increase — )Other claims, net

(increase — )

Total

10,073-9,890

93

276-288

40

28

57

-381457

-37

39

67

-219

8732

-100

1,040-671

369

336

101

-361

-76

-336

1,309-1,127

-31

151176

-453

-126

259

15

-5

1

-125

4

112-32

84

69—

69

28

——

-28

-28

Total, By Quarters

Total

11,382-11,017

62

427-112-413

-98

316

-380462

-42

40

-58

-215

199—

-16

1,109-671

438

364

101

-361

— 104

-364

Firstquarter

2,674-2,657

10

2725

-122

-70

52

-49925

38

-32

-61

60—

— 1

-14-5

-19

-52

-27

36

43

52

Secondquarter

2,819-2,806

22

3523

-106

-48

54

-6663

— 1

— 4

-52

11

129—

140

114-200

-86

2

98

-75

-25

-2

Thirdquarter

2,898— 2,693

23

228-138-92

-2

95

-98145

-12

35

33

-9

-64—

-73

478-360

118

78

1

-59

-20

-78

Fourthquarter

2,991-2,861

7

137-22-93

22

115

-167162

-24

-29

-7

-156

74—

-82

531-106

425

336

29

-263

-102

-336

Source: Data provided by the French authorities.1 Preliminary estimates, not exactly comparable with previously published figures, which showed transactions of Metro-

politan France with countries outside the French franc area. The present table shows the transactions of France (includ-ing overseas departments and territories) with the rest of the world (including the independent countries of the Frenchfranc area). In addition, certain changes have been introduced in the methods used in the compilation of the estimates.



TABLE 40. FEDERAL REPUBLIC OF GERMANY: BALANCE OF PAYMENTS SUMMARY, 1966-Fmsr QUARTER 1968 *


1967 2

A. Goods, Services, and Transfer PaymentsExports f.o.b.Imports c.i.f.Other merchandise

Trade balancePaid services to foreign troopsOther services (net)

Total goods and servicesTransfer payments

Total


B. Long-Term CapitalPrivate liabilitiesPrivate assets (increase — )Advance debt redemptionOther government long-term capital

Total

C. Total (AplusB)Total, excluding advance debt redemption

D. Short-Term Capital, n.i.e. (includingnet errors and omissions)

Government short-term capitalOther short-term capitalNet errors and omissions

Total

E. Commercial Bank Short-Term Capital (net)Short-term credits (net)Foreigners' depositsForeign exchange (increase — ) 8

Total


G. Official Monetary MovementsIMF accountsBundesbank investment in

U.S. Treasury paper 4

Other claims (net) 5

Freely usable assets (increase — ) 8

Monetary gold (increase — )

Total

1966

20,138-18,024

-259

1,8551,240

-1,422

1,673-1,566

107

841

1,053-631-235-398

-211

-104131

— 42427167

552

-118-829

-97

351

-181

249-537

118

-351

19672

21,741-17,352

-249

4,1401,315

-1,473

3,982-1,568

2,414

3,228

303-848

-359

-904

1,5101,510

48-391-265

-608

-117304

-992

-805

97

205

-25027

-14364

-97

Firstquarter

5,191-4,080

-85

1,026291

-259

1,058-391

667

884

136-185

-49

-98

569569

-21147223

349

-130-195-494

-819

99

-3

-10814

-2

-99

Secondquarter

5,471-4,324

-80

1,067335

-362

1,040-413

627

859

24-186

-87

-249

378378

-65-70

-212

-347

-21115

-339

-245

-214

169

-1256

1

214

Thirdquarter

5,169-4,188

-11

970337

-574

733-364

369

557

121-247

-79

-205

164164

101-114

24

11

2487

-157

-46

129

10

-12592

-1159

-129

Fourthquarter

5,910-4,760

-73

1,077352

-278

1,151-400

751

954

22-230

— 144

-352

399399

33-354-300

-621

10297-2

305

83

29

-12555

-9856

-83

1968 2

Firstquarter

5,825-4,695

-70

1,060321

-226

1,155-383

772

995

44-465

-70

-491

281281

6416

484

564

-90-21

-351

-462

383

-82

-1254

-436256

-383

Source: Deutsche Bundesbank, Monthly Report.1 Positive figures are credits; negative figures are debits.2 Preliminary.3 U.S. dollars put at the disposal of the commercial banks by the Bundesbank through swap arrangements are included

in the commercial banks' foreign exchange in Group E and excluded from the Bundesbank foreign exchange in Group G.4 Made in accordance with the U.S.-German agreements of May 1967.5 Covers other assets and liabilities of the Bundesbank and liabilities resulting from the sale of German money-market

paper to foreign monetary authorities.



TABLE 41. ITALY: BALANCE OF PAYMENTS SUMMARY, 1966-FiRST QUARTER 1968 *


1967 2

A. Goods, Services, and Transfer PaymentsExports f.o.b.Imports f.o.b.

Trade balanceTravel (net)Other services (net)Transfer payments (net)

Total

1966

7,929-7,595

3341,199

236348

2,117

1967 2

8,601-8,468

1331,126

157283

1,699

Firstquarter

2,093-2,119

-26144-469

183

Secondquarter

2,167-2,123

442724785

448

Thirdquarter

2,037-1,985

52501140

93

786

Fourthquarter

2,304-2,241

63209

-2636

282

19682

Firstquarter

2,351-2,095

256155-6

33

438


B.

C.

D.

E

F

Private Transfers

Capital Movements (excluding Group D)and Net Errors and Omissions

Foreign investments in Italy 8

Italian investment abroadRepatriation of Italian banknotes 3

Trade credits, netNet errors and omissionsAdvance debt redemptionOther government capital

Total

Total (AplusB)Total, excluding advance debt redemption

Commercial Bank CapitalLiabilitiesAssets (increase — )

Total

, Total (C through D)

. Official Monetary MovementsIMF accountsShort-term liabilitiesForeign exchange (increase — )Other claims (increase — )Monetary gold (increase — )

Total

2,224

260-449-559-543-35

-145-70

-1,541

576727

426-834

-408

168

-335-29235

-29-10

-168

1,855

210-318-801-231-106

—-90

-1,336

363363

484-289

195

558

421

-610-5

14

-558

213

54-129-229-65-72

—-11

-452

-269-269

-257385

128

-141

-255

166-3-2

141

472

29-22

-204-180

7—

-29

-399

4949

6281

143

192

1015

-212-9

4

-192

815

14-50

-12368

-79—-28

-198

588588

296-379

-83

505

6-33

-4945

11

-505

355

113-117-245-54

38—-22

-287

— 5-5

383-376

7

2

5114

-7021

-2

506

49-125-342-113-98

—8

-621

-183-183

20-2

18

-165

-52-18

1931824

165

Sources: Ufficio Italiano dei Cambi, Movimento Valutario, and Bank of Italy.1 Positive figures are credits; negative figures are debits. Some data in Group A and all data in Group B are on a

payments (exchange record) basis.8 Preliminary.'Part of "Foreign investments in Italy" is believed to be financed from the proceeds of Italian banknotes remitted

abroad and subsequently repatriated; to that extent foreign investment in Italy may be overstated.



TABLE 42. JAPAN: BALANCE OF PAYMENTS SUMMARY, 1966-FiRST QUARTER 1968


1967 2

A. Goods, Services, and Transfer PaymentsExports f.o.b.Imports f.o.b.

Trade balanceGovernment special receipts 3

Other services and transfer payments(net)

Total

Memorandum item : Goods, Services, andPrivate Transfers

B.

C.

D.

E.

F.

G.

Long-Term CapitalDirect investmentTrade credits and loans extendedOther

Total

Total (AplusB)

Short-Term Capital, n.i.e. (includingnet errors and omissions)

Nonmonetary sectorsNet errors and omissions

Total


Total

Total (C through E)

Official Monetary MovementsIMF accountsOfficial reserves (increase — )Other

Total

1966

9,639-7,366

2,273476

-1,498

1,251

1,380

-75-550-183

-808

443

-64-44

-108

-276-113

-389

-54

-669921

54

1967 2

10,228-9,070

1,158524

— 1,874

-192

-39

-78-702-32

-812

-1,004

507-74

433

988-478

510

-61

827

-28

61

Firstquarter

2,225-2,073

152123

-449

-174

-138

1-146-37

-182

-356

131-58

73

25249

301

18

39-42-15

— 18

Secondquarter

2,495-2,325

170131

-475

-174

-725

-9-142

— 31

-182

-356

186-37

149

330-145

185

-22

203

-1

22

Thirdquarter

2,673— 2,223

450127

-440

137

167

-18-196

-9

-223

-86

7725

102

72-135

-63

-47

52-5

47

Fourthquarter

2,835-2,449

386143

-510

19

57

-52-218

45

-225

-206

113-4

109

334-247

87

-10

23-6-7

10

1968 2

Firstquarter

2,569-2,449

120129

-547

-298

—262

-21-181

105

-97

-395

10444

148

16937

206

-41

1329-1

41

Sources: Bank of Japan, Balance of Payments Monthly and Economic Statistics Monthly.1 Positive figures are credits; negative figures are debits.2 Preliminary.8 Includes sales of goods and services to foreign military forces.


BALANCE OF PAYMENTS STATEMENTS

TABLE 43. NETHERLANDS: BALANCE OF PAYMENTS SUMMARY, 1966-FiRST QUARTER 19681


119

A. Goods, Services, and Transfer PaymentsExports f .o.b.Imports f.o.b.


Total


B.

C.

D.

E.

F.

G.

Long-Term Capital, n.i.e.PrivateOfficial

Total

Total (AplusB)

Short-Term Capital, n.i.e. (includingnet errors and omissions)

Private nonmonetaryNet errors and omissions

Total


Total

Total (C through E)

Official Monetary MovementsIMF accountsShort-term liabilities 3

Other short-term assets (increase — ) 3

Monetary gold (increase — )

Total

1966

6,461-7,056

-595462

-59

-192

-147

69-25

44

-148

-21116

95

427-332

95

42

-55—4-926

-42

1967 2

6,843-7,415

-572531

-63

-104

-46

-81-22

-103

-207

69181

250

140-12

128

171

611

-25219

— 171

Firstquarter

1,591-1,793

-202123

-16

-95

-80

-155

-20

— 115

561

66

-119146

27

-22

-101

31

22

1967

Secondquarter

1,707-1,889

-18295

-17

-104

-87

-37-3

-40

— 144

-485

81

144-25

119

56

462

-103— 1

-56

2

Thirdquarter

1,728-1,748

-20157

-25

112

732

-20-9

-29

83

28-18

10

64-151

-87

6

6-3-9

—6

Fourthquarter

1,817-1,985

-168156-5

-17

-11

-9-5

-14

-31

4053

93

5118

69

131

191

-17120

-131

1968 2

Firstquarter

1,798-1,924

-12690

-21

-57

-35

-10-6

-16

-73

-3077

47

153-189

-36

-62

-126

13157

62

Source: Data provided by the Netherlands Bank.1 Positive figures are credits; negative figures are debits.2 Preliminary.8 Payments agreement liabilities are included with "Other short-term assets" of the central bank.



TABLE 44. UNITED KINGDOM: BALANCE OF PAYMENTS SUMMARY, 1966-FiRST QUARTER 1968 l


A Goods, Services, and Transfer Payments,seasonally adjusted

Exports f.o.b.Imports f.o.b.Payments for U.S. military aircraft

Trade balanceServices and transfer payments (net)

Total

1966

14,325-14,622 -

-115

-412325

-87

1967'

13,882•15,332-267

-1,717377

-1,340

Firstquarter

3,805-3,870

-64

-129191

62

1967

Secondquarter

3,584-3,906

-81

-40364

-339

2

Third Fourthquarter quarter

3,550 2,943-3,774 -3,782

-56

-280154

-126

-66

-905-32

-937

19682

Firstquarter

3,542-4,015

-55

-528206

-322


B

C

D

E

F

G

H

Private Transfers, seasonally adjusted

Long-Term Capital Movements, n.i.e.,seasonally adjusted

OfficialPrivate investment (net)

Abroad (increase — )In United Kingdom

Total

Total (A plus B), seasonally adjustedTotal (A plus B), unadjusted

Net Errors and Omissions

Short-Term Capital Movements, n.i.e.Miscellaneous capitalForeign currency liabilities (net) of banksSterling liabilities (net) other than to

central monetary institutions,BIS, and IMF

Sterling area countriesOther

Total

Total (C through E)

Exchange Adjustments

. Official Monetary MovementsIMF accountsGold deposit liability to IMFSterling liabilities (net) to central

monetary institutions and BISSterling area countriesOther

Official liabilities in non-sterlingcurrencies

Transfer of securities from dollarportfolio to reserves

Convertible currency reserves(increase — )

Gold reserves (increase — )

Total

423

-230

-817762

-285

-372-372

-37

-339 -453

67-434

-1,159

-1,568

—

-4134

-75821

39

885

-420325

1,568

-850

-137

-9971,059

-75

-1,415-1,415

551

>-4243

-424

-1,2883

-8521

J820

424

490

-244649

1,288

755

-61

-216288

11

739

453

56392

70361

879

1,341

—

-591

146-1,231

-39

—-422

263

— 1,341

-207

-8

-247252

-3

-342-171

216

146-62

-17473

-17

28

—

-464—

-140151

—

—

456-31

-28

-14

-42

-171199

-14

-814

-26

-363320

-69

_140 -1,006-353

-216

-2-84

-67-457 J

-610

-900

98

>-6763

-676

-1,179 -1,478

—

— 14—

-1121,204

—

—

224-123

1,179

3

-315—

I 802

463

490

-502540

1,478

-795

-72

-439156

-355

-677-660

-211

84-34

41-331

-240

-1,111

-298

10—

204918

304

—

175-202

1,409

Source: U.K. Central Statistical Office, Balance of Payments article in Economic Trends for June 1968, and estimatesfor fourth quarter of 1967 provided by Central Statistical Office.

1 Positive figures are credits; negative figures are debits.2 Preliminary.8 Exchange adjustments are included in the figure for Group E.



TABLE 45. UNITED STATES: BALANCE OF PAYMENTS SUMMARY, SEASONALLY ADJUSTED, 1966-FmsT QUARTER 1968 '


1961s

A.

B.

C.D.E.

F.

G.H.

Goods, Services, and Transfers(excluding aid)

Exports f.o.b.Imports f.o.b.

Export surplusNet military expendituresInvestment incomeOther services, remittances, and pensions

(excluding aid and military transfers)

TotalAid and Nonmonetary Sectors' Selected

CapitalAdvance repayments on U.S. Government

loansOther government capital and grantsDirect investment abroadPortfolio investment abroadForeign direct and portfolio investment in

United States

TotalTotal (AplusB)Net Errors and OmissionsShort-Term Capital, n.i.e.

Foreign non liquid capitalForeign liquid capitalU.S. private assets (increase — )

Total

Liquid Liabilities to Foreign CommercialBanks

Total (C through F)"Official Settlements" 8

Liabilities to foreign official agenciesNonliquid liabilitiesLiquid liabilities

IMF accountsU.S. convertible currency holdings

(increase — )Gold sales

1966

29,176-25,541

3,635-2,906

4,178

-842

4,065

429-3,873-3,623

-256

1,363

-5,960-1,895

-213

408-313-418

-323

2,697

266

761-1,595

278

-540830

Total -266Main Categories, without seasonal adjustment

Export surplusServices and transfers (excluding aid)Aid and nonmonetary sectors' selected capital

SubtotalUnrecorded transactionsShort-term capital, n.i.e.Liquid liabilities to foreign commercial banks

Subtotal"Official Settlements"

Memorandum item: Change (increase — ) inmonetary reserve assets net of liquidliabilities

Seasonally adjustedWithout seasonal adjustment 1,357

1967s

30,468-26,991

3,477-3,100

4,566

-1,449

3,494

5-4,216-3,021-1,270

1,505

-6,997-3,503

-535

390195

-1,214

-629

1,262

-3,405

1,2912,062-94

-1,0241,170

3,405

3,571

Firstquarter

7,661-6,686

975-7371,034

-241

1,031

-1,176-653-174

389

-1,614-583-250

13660

-148

48

-979

-1,764

340397-3

1,00751

1,764

943263

— 1,842

-636-6116

-753

-6431,279

505238

Secondquarter

7,703-6,605

1,098-729

996

-488

877

-1,039-651-181

395

-1,476-599-458

220-52

-272

-104

355

-806

587638

-10

-42415

806

1,289-216

-1,800

-727-342

203161

22705

522220

Source: U.S. Department of Commerce, Survey of Current Business, June 1968.1 Positive figures are credits; negative figures are debits.a Preliminary.'The items in this group are not separately available on a seasonally adjusted basis,

arbitrarily been allocated to the series for liquid liabilities to foreign official agencies.

Thirdquarter

7,626-6,541

1,085-8531,252

-483

1,001

5-993-902-506

571

-1,825-824

207

6956

-380

-255

1,119

247

1262

-5

-46292

-247

716-695

-1,624

-1,603163150

1,265

1,57825

8021,212

Fourthquarter

7,478-7,159

319-7811,284

-237

585

-1,008-815-409

150

-2,082-1,497

-34

-35131

-414

-318

767

-1,082

2381,025-48

-1,1451,012

1,082

529664

— 2,475

-1,282-348-355

589

-1141,396

1,7421,901

19681'

Firstquarter

7,924-7,840

84-8021,111

-288

105

42-1,205

-468-160

995

-796-691-148

-5678

-83

-61

390

-510

372-766-57

-4011,362

510

140254

-787

-39395

-228616

483-90

606224

and the entire adjustment has


122

TABLE 46. PRIMARY PRODUCING COUNTRIES: BALANCE OF PAYMENTS SUMMARIES, 1966 AND 1967 *


1966

Exportsf.o.b.

A.

B.

C

More DevelopedPrimary Producers

AustraliaFinlandGreeceIcelandIrelandNew ZealandPortugalSouth AfricaSpainTurkeyYugoslavia

Total, Group A

Less DevelopedPrimary Producers

Western HemisphereArgentinaBoliviaBrazilChileColombiaCosta RicaDominican RepublicEcuadorEl SalvadorGuatemalaHaitiHondurasJamaicaMexicoNicaraguaPanamaParaguayPeruTrinidad and TobagoUruguayVenezuela

Subtotal, WesternHemisphere

AsiaBurmaCeylonChina, Republic ofIndiaIndonesiaKoreaMalaysiaPakistanPhilippinesSingaporeThailandViet-Nam

Subtotal, Asia

Middle EastCyprusIranIraqIsraelJordanSaudi ArabiaSyrian Arab RepublicUnited Arab Republic

Subtotal, MiddleEast

AfricaEthiopiaGhanaIvory CoastKenyaLibyaMalawiMoroccoNigeriaSierra LeoneSomaliaSudanTanzaniaTunisiaZambia

Subtotal, Africa

Total, Group B

. Total Primary Producers

(1)

3,0861,494

426139654

1,113684

2,7541,308

4941,222

13,374

1,593133

1,74186553413613818719022935

145227

1,22814310354

789425190

2,342

11,427

191352543

1,531714250

1,244569863

1,03566425

7,981

771,392

93447529

1,503173597

5,180

112281325243

1,00247

4287867830

212248138622

4,552

29,140

42,514

Importsf.o.b.3

(2)

-2,983— 1,731 5

— 1,1535

-147-1,0205

— 947-1,075—2,348—3300

—639-1,5755

-16,918

— 1,1245— 139

— 1,303— 779 5

-639— 162— 161-153— 202-202-42

— 138— 283

— 1,6195

-152— 218

— 58— 747-4555— 132

-1,297

- 10,005

-176— 4245— 586

-2,6005— 5%— 680

-1,065— 880-853

-1,250— 8795

-6565

— 10,645

— 134— 9645-4955— 734— 1885

— 604— 2915

-9535

-4,363

— 142-337— 2785— 3135

— 4095

— 75—443— 7025

— 86— 45s

— 2365

— 2435-250-368

— 3,927

— 28,940

— 45,858

TradeBalance(Cols.1+2)

(3)

103— 237-111

-8-366

166-391

406-1,992

-145-353

-3,544

469-643886

-105— 26— 23

34— 12

27— 7

7— 56

— 391-9

— 115— 442

-3058

1,045

1,422

15— 72— 43

-1,069118

—430179

— 31110

-215—215— 631

— 2,664

— 57428439

— 259— 159

899— 118— 356

817

— 30—56

47— 70593

— 28— 15

84— 8

— 15— 24

5— 112

254

625

200

-3,344

Servicesand

PrivateTransferPayments

(4)

-64535

489

—285— 288

429-4831,425

71301

1,619

-212-26

— 505— 154-185

— 22— 45-55— 32

44-2

— 301724

— 4569

— 9— 207-19

— 8— 1,090

— 2,580

— 35— 2

35100

— 241205

-205— 93

126199208365

662

60— 565— 420

10467

— 84067

180

— 1,347

— 14— 92— 96

43— 492

— 10— 30

— 367— 17

— 6— 31

— 8— 17

-178

-1,315

-4,580

—2,961

Goods,Services,

andPrivate

TransferPayments

(Cols.3 + 4)

(5)

-542-202-238

— 8— 81

— 12238

— 77— 567-74-52

-1,925

257— 32— 67— 68

-290—48— 68-21— 44— 17

— 9— 23— 39

— 367— 54— 46— 13

— 165-49

50— 45

— 1,158

-20— 74-8

— 969— 123— 225

— 26— 404

136— 16

— 7-266

-2,002.

3-— 137

19— 155

— 9259

— 51-176

-530

— 44— 148

— 49— 27

101— 38— 45

—283— 25— 21— 55

— 3— 129

76

-690

-4,380

-6,305

CentralGovern-

mentCapitaland Aid

(6)

-320-12

723

4247283139

116178

224

5131

242134544

421617136

105114135

1447

149

868

3029

— 596411516020

33721

— 4147

399

2,076

i92

180

10110021

134

528

26542239

— 22437274

19437

56— 58

298

3,770

3,994

PrivateLong-Term

Capital(7)

63543

1479

704

8712230220

1,431

-124

132— 14

95357

16182918

26517208

5836

— 4120

839

-342136

1776464

— 123036

— 2

415

118771

1001

442

-13

303

18591

12— 44

47

184921

1353

3

322

1,879

3,310

BasicBalance(Cols. 5through

(V)

-227-171

— 194

31— 79

15376

-22662

126

-270

2963

30752

-141— 9

— 1911

— 913

-5-9

— 29— 51-23— 13

—37— 66084

549

10— 48

298

— 2112583

145-27

76131

489

1342912510

203— 28-55

301

— 35-26

2455

-10— 1

-72-12

— 1117

—2021

—70

1,269

999

OtherShort-Term

Capitaland NetErrors

andOmissions

(9)

2804542—5324

-1213661

-50— 81

498

-190-1

— 3524

1042

-14—— 3

-2256

40«302521

— 583

-118-121

-320

-3— 57

— 19205

— 92-25

-17442

104-3

— 157

2— 33-14— 58

18-90

2058

-97

11927

-2375

-944102269

— 9

142

— 432

66

Total*(Cols.8 + 9)(10)

53-126

234

84-55

141212

-1651245

228

1062

27276

-37-7

-3311

-12— 9

—-311

-212

— 111

— 21-3

-58-37

229

7-53

22— 11

18117

— 34-28— 29

15180128

332

159

77-33

28113-8

3

204

1— 16

12292

-5— 10-28-2

2-923

-1112

72

837

1,065

ANNUAL REPORT, 1968

Source: International Monetary Fund, Balance of payments Yearbook. 2Positive figures are credits; negative figures are debits,liminary and including Fund staff estimates. 3F.O.b unless otherwise noted.

Footnote continued on page 123.



TABLE 46 (concluded). PRIMARY PRODUCING COUNTRIES: BALANCE OF PAYMENTS SUMMARIES, 1966 AND 1967 ]


Exportsf.o.b.(1)

A. More DevelopedPrimary Producers

AustraliaFinlandGreeceIcelandIrelandNew ZealandPortugalSouth AfricaSpainTurkeyYugoslavia

Total, Group A

B. Less DevelopedPrimary Producers

Western HemisphereArgentinaBoliviaBrazilChileColombiaCosta RicaDominican RepublicEcuadorEl SalvadorGuatemalaHaitiHondurasJamaicaMexicoNicaraguaPanamaParaguayPeruTrinidad and TobagoUruguayVenezuela

Subtotal, WesternHemisphere

AsiaBurmaCeylonChina, Republic ofIndiaIndonesiaKoreaMalaysiaPakistanPhilippinesSingaporeThailandViet-Nam

Subtotal, Asia

Middle EastCyprusIranIraqIsraelJordanSaudi ArabiaSyrian Arab RepublicUnited Arab Republic

Subtotal, MiddleEast

AfricaEthiopiaGhanaIvory CoastKenyaLibyaMalawiMoroccoNigeriaSierra LeoneSomaliaSudanTanzaniaTunisiaZambia

Subtotal, Africa

Total, Group B

C. Total Primary Producers

3,3891,515

488100760958758

2,9401,419

5301,253

14,110

1,485148

1,652876552146157200208206

32151232

1,14815211357

753431159

2,462

11,320

127338652

1,648770320

1,220570830

1,055668

33

8,231

801,747

81053232

1,516155596

5,468

103301340222

1,17855

424669

7029

218248147651

4,655

29,674

43,784

Importsf.o.b.a

(2)

-3,350-1,6946— 1,1616

-155-1,0606

— 831-1,114-2,755-3,200

— 608-1,7086

-17,636

— 1,1206— 137

— 1,441-8225— 480— 171— 172— 177-205— 230-40

-156— 3525

-1,7496-172-232

— 65-802— 4085— 1715

-1,337

- 10,439

-136— 4105-769

— 2,7756— 796—909

-1,078— 1,109— 1,054-1,351

— 9915

-7265

-12,104

-141-1,1155

-4505— 669— 1556-576— 2645— 9296

— 4,299

-126-284— 2785

-3226

-4806— 69

— 480-5955-905— 435

— 2395

-2475-251-469

-3,973

-30,815

-48,451

TradeBalance(Cols.1+2)

(3)

39-179— 673-55

-300127

-356185

-1,781— 78

-455

-3,526

36511

2115472

-25-15

233

-24-8-5

— 120— 601-20

-119— 8

-4923

— 121,125

881

— 9— 72

-117-1,127

— 26— 589

142-539— 224-296— 323-693

-3,873

-61632360

-137— 123

00— 109-333

1,169

-231762

-100698

— 14— 56

74-20— 14— 21

1— 104

182

682

-1,141

— 4,667

Servicesand

PrivateTransferPayments

(4)

-73017

482— 1325

— 276490

-4821,315

27353

1,520

-178— 45

-542-212— 136-25-52— 61-29— 48

4-30

50138

-4684

— 10— 198

—4418

-1,157

-2,519

-22-520

-31-263

259— 198-130

122206280339

577

66-716— 354

23149

-8869764

— 1,449

-19— 101— 120

55— 518

— 15g— 314

— 3

-283

— 19— 181

-1,268

-4,659

-3,139

1967

Goods,Services,

andPrivate

TransferPayments

(Cols.

'&>

-691-162— 191-56

25— 149

134-297-466

— 51-102

— 2,006

187— 34

-331-158

— 64— 50-67— 38-26-72

— 4-35-70

— 463-66-35-18

-247-21

6— 32

-1,638

-31— 77— 97

-1,158-289— 330-56

-669— 102

—90— 43

— 354

— 3,296

5-84

694

— 7454

— 12— 269

-280

-42— 84— 58— 45

180— 29— 64

— 240— 23— 14-49

4— 123

1

-586

-5,800

-7,806

2

CentralGovern-

mentCapitaland Aid

(6)

-371

165

85192237

125165

438

-5436«

142586367°3013131237

1060141117

14315«

— 11

640

19431

1,228305 «155

1555048

-9068

383

2,725

111043

21215011850

200

882

14-52518

-793043704

12289

5753

279

4,526

4,964

PrivateLong-Term

Capital(7)

60475

1601320

-352

200509— 9—

1,621

316

iss6343

'23331637

110

2301734

2125

il9

1,146

—j12415

1934463

— 23572

-2

541

10496

23

95

—

183

15365

20-47

2129792

-3

646

218

2,088

3,709

BasicBalance(Cols. 5through

<78)

-124-86-15-38

45-67205

—75806563

53

4492

— 4-37

4217

-1483

-23

-Is-60

-173-35-21

3-83

51176

148

-12-35

288516183

-56— 56

-1459727

-30

147555

32976

26738

— 69

785

— 13-53— 28

— 7543

-9— 73— 10

-2413

-260

-89

814

867

OtherShort-Term

Capitaland NetErrors

andOmissions

(9)

1133

3814

-35-4

-4362

-204-60

— 116

-73-12—96

10-6—2

32

—416

-21854«

2131819

— 252

-3— 224

227

-247

19-116-25

100-21

24— 68

154— 1

1

50

3-43— 48°

-110

-20724

-399

— 11

3619

-61

-12— 14

6— 1-2

2

-56

-31

-153

-269

Total *(Cols.8+9)

(10)

— 11-83

23-24

10-71

162-13

-1245

63

-63

376— 10

-100-27

3615

-1110

-1fj-2

—-640

-17— 2

1-31

29

100

375

-36-28

47-319

118-18-32

-1249

9628

20

17327

219766040

-65

386

-14— 52

812484

— 21-87-4

1— 26

11-2

4

-120

661

598

For footnotes 1-3, see page 122.4 Reflects net official reserve movements, i.e., changes in foreign liabilities of countries' central monetary institutions in addition to changes

in their official gold holdings, Fund positions, and foreign assets. Positive figures indicate surpluses; negative figures indicate deficits.5 C.i.f. 6 Including private long-term capital.


APPENDICES


Appendix I. EXECUTIVE BOARD DECISIONS AND REPORT PROPOSINGAMENDMENT OF ARTICLES OF AGREEMENT

A. Repurchases: Small Amounts Included in Article V, Section 7(6), Obligations

A. 1. If a provisional or final repurchase obligation includes an amount of gold or cur-rency equivalent to $500 or less, such amount shall not be collected. No adjustments ofrepurchase obligations shall be made if they involve an amount of gold or currencyequivalent to $500 or less.

2. This decision supersedes Executive Board Decision No. 705-(57/55).

B. Paragraph 1 of Executive Board Decision No. 1813-(65/4)1 is amended to read asfollows:

1. Where on any April 30 the Fund holds a member's currency in an amount that isin excess of 75 per cent of the member's quota by more than $500, the member shallmake a provisional monetary reserves report to the Fund not later than May 31, preferablyby cable.

Decision No. 2499-(68/77)April 19, 1968

B. Report of the Executive Directors and Proposed Amendmentto the Articles of Agreement

I. Pursuant to Resolution No. 22-8 of the Twenty-Second Annual Meeting, the Execu-tive Directors:

(a) Adopt the Report entitled Establishment of a Facility Based on Special DrawingRights in the International Monetary Fund and Modifications in the Rules andPractices of the Fund;

(b) Propose the introduction in the Articles of Agreement of the modifications setforth in the Proposed Amendment attached to the Resolution in Annex A tothe Report; and

(c) Recommend the adoption by the Board of Governors of the Resolution in Annex Ato the Report.

II. The Executive Directors note that the Secretary has been authorized anddirected by the Chairman of the Board of Governors of the Fund to bring before theBoard of Governors on his behalf by rapid means of communication the proposal ofthe Executive Directors introducing modifications in the Articles of Agreement pursuantto Resolution No. 22-8; pursuant to this request the Secretary is sending it to the Boardwith the Report. The Executive Directors authorize and direct the Secretary to send toeach member of the Fund this Report with a request for a vote by its Governor on theResolution in Annex A.

III. The Board of Governors is requested, pursuant to Section 13 of the By-Laws, tovote without meeting on the Resolution in Annex A of the Report. Pursuant further tothis By-Law, the Executive Directors waive the requirement that Governors shall not

1 See Annual Report, 1965, page 123.

127


Appendix I (continued). EXECUTIVE BOARD DECISIONS AND REPORT

vote on any motion presented by the Executive Directors until seven days after thedispatch of the motion. To be valid, the votes must be received at the seat of the Fundon or before May 31, 1968. Votes received after that date will not be counted.

IV. The effective date of the Resolution of the Board of Governors shall be the lastday allowed for voting.

V. The Secretary is authorized to take such action as he shall deem necessary orappropriate to carry out the purpose of this decision.

Decision No. 2493-(68/74)April 16, 1968

128



Establishment of a Facility Based on Special Drawing Rights inthe International Monetary Fund and Modifications in the

Rules and Practices of the Fund

A Report by the Executive Directors to theBoard of Governors Proposing Amendment of

the Articles of Agreement

129



TABLE OF CONTENTS

PageIntroduction 133

PART I

The New Facility 1341. General Comments 1342. The Special Drawing Account 1353. Participation in the Special Drawing Account 1354. Holders of Special Drawing Rights Other than Participants 1365. Recording and Information 1366. Principles Governing Allocations and Cancellations 1377. First Decision to Allocate Special Drawing Rights 1378. Allocation and Cancellation 1379. Decisions on Allocations and Cancellations 138

10. Operations and Transactions in Special Drawing Rights 13811. Receipt of Allocations 13812. Character of Special Drawing Rights 13813. Designation of Participants to Provide Currency 13914. Transactions not Requiring Designation 14015. Requirement of Need 14016. Transactions without Requirement of Need 14117. Reconstitution 14118. Operations and Transactions through the General Account 14119. Exchange Rates 14220. Interest and Charges 14221. Expenses of the Special Drawing Account 14222. Administration of the Special Drawing Account 14323. Suspension of Participants' Use of Special Drawing Rights 14324. Definition of Currency Convertible in Fact for Transactions in Special

Drawing Rights 14325. Definition of Reserve Position in the Fund 14426. Termination of Participation 14427. Liquidation 144

PART II

Modifications in Rules and Practices of the Fund 14428. General Comments 14429. Quota Changes and Related Matters 14530. Uniform Proportionate Changes in Par Values and Maintenance of Gold

Value 14631. Temporary Character of Use of the Fund's Resources 14632. Legal Automaticity of Gold Tranche Purchases 14633. Definition of Gold Tranche Purchases 14734. Termination of Power to Establish New Unconditional Facilities in the

General Account 148

130



Page35. Rules on Repurchase 14836. Service Charge 15037. Remuneration 15038. Distribution of Net Income 15039. Interpretation 151

PART III

Procedure 15140. Applicable Legal Provisions 15141. Resolution of Board of Governors 15242. Acceptance of Proposed Amendment by Members 15243. Entry into Force of Proposed Amendment 15244. Notification to Depositary of Articles of Agreement 153

ANNEX A

Resolution 153

PROPOSED AMENDMENT TO THE ARTICLES OF AGREEMENT OF THEINTERNATIONAL MONETARY FUND, PREPARED PURSUANT TO BOARD OFGOVERNORS RESOLUTION No. 22-8

A.B.C.D.E.F.G.H.I.J.

K.

Introductory ArticleArticleArticleArticleArticleArticleArticleArticleArticleArticleArticlesArticleArticleArticleArticleArticleArticleArticle

ArticleArticleArticleArticleArticle

I.III.IV.V.VI.XII.XVIII.XIX.XX.

PurposesQuotas and SubscriptionsPar Values of CurrenciesTransactions with the FundCapital TransfersOrganization and ManagementInterpretationExplanation of TermsFinal Provisions

XXI through XXXIIXXI.XXII.XXIII.XXIV.XXV.XXVI.XXVII.

XXVIII.XXIX.XXX.XXXI.XXXII.

Special Drawing RightsGeneral Account and Special Drawing AccountParticipants and Other Holders of Special Drawing Rights .Allocation and Cancellation of Special Drawing Rights .Operations and Transactions in Special Drawing RightsSpecial Drawing Account Interest and ChargesAdministration of the General Account and the Special

Drawing AccountGeneral Obligations of ParticipantsSuspension of Transactions in Special Drawing RightsTermination of ParticipationLiquidation of the Special Drawing AccountExplanation of Terms with respect to Special Drawing

Rights131

154154154155155156157157157158158158158159159161163

163164164165166

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Page

L. Schedule B. Provisions with respect to Repurchase by a Member of its Cur-rency Held by the Fund 167

M. Schedules F through 1 168Schedule F. Designation 168Schedule G. Reconstitution 168Schedule H. Termination of Participation 169Schedule I. Administration of Liquidation of the Special Drawing Account 169

ANNEX B

Outline of a Facility Based on Special Drawing Rights in the Fund 171Introduction 171I. Establishment of a Special Drawing Account in the Fund 171II. Participants and Other Holders 171III. Allocation of Special Drawing Rights 171IV. Cancellation of Special Drawing Rights 172V. Use of Special Drawing Rights 172VI. Interest and Maintenance of Gold Value 173VII. Functions of Fund Organs and Voting 173VIII. General Provisions 173IX. Entry into Force 174

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INTRODUCTION

At its Twenty-Second Annual Meeting at Rio de Janeiro in September 1967, the Boardof Governors adopted the following Resolution:

WHEREAS the functioning of the international monetary system and its improve-ment, including arrangements to meet the need, as and when it arises, for a supplementto existing reserve assets, have been the subject of extensive study and internationaldiscussion resulting in the Outline of a Facility Based on Special Drawing Rights in theInternational Monetary Fund, which Outline is attached to this Resolution; and

WHEREAS studies are currently under way on possible improvements in the presentrules and practices of the Fund;

NOW, THEREFORE, the Board of Governors hereby RESOLVES:That the Executive Directors are requested to

1. Proceed with their work relating to both(a) the establishment in the Fund of a new facility on the basis of the Out-

line in order to meet the need, as and when it arises, for a supplement toexisting reserve assets, and

(b) improvements in the present rules and practices of the Fund based ondevelopments in world economic conditions and the experience of theFund since the adoption of the Articles of Agreement of the Fund; and

2. Submit to the Board of Governors as soon as possible but not later thanMarch 31, 1968(a) a report proposing amendments to the Articles of Agreement and the

By-Laws for the purpose of establishing a new facility on the basis ofthe Outline, and

(b) a report proposing such amendments to the Articles of Agreement andthe By-Laws as would be required to give effect to those modifications inthe present rules and practices of the Fund that the Executive Directorswill recommend.

As the Governors have been informed, it was not possible to complete by March 31,1968 the work on the two subjects referred to in paragraph 1 of this Resolution. TheExecutive Directors are now submitting to the Board of Governors the present Reportwhich combines the two reports envisaged in paragraph 2 of the Resolution. Part Iconstitutes the first and Part II the second of these two reports. The recommendationsof the Executive Directors are presented together in Annex A to this Report.

Annex A submits for approval by the Board of Governors a Resolution proposingmodifications in the Articles of Agreement of the International Monetary Fund for thepurpose of (a) establishing in the Fund a facility for special drawing rights based on theOutline, and (b) giving effect to certain changes in the present rules and practices of theFund that the Executive Directors have decided to recommend. They are not recommend-ing modifications in the By-Laws at this time. It would not be possible for the Board ofGovernors to adopt By-Laws relating to the new facility until the participation requirementprescribed in Article XXIII, Section 1, has been met. Recommendations will be sub-mitted in due course.

The modifications in the Articles of Agreement under both (a) and (b) above are setforth in the Proposed Amendment which appears in the attachment to the Resolution.The Executive Directors recommend to the Board of Governors the adoption of thisResolution.

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The Outline referred to above is also annexed to this Report (Annex B).While the modifications set forth in Annex A are for the most part self-explanatory,

the Executive Directors believe that brief comments on various aspects of these modifica-tions may be useful to Governors and to member governments. They are to be found inParts I and II of the Report.

In addition, Part III of the Report describes the procedure to be followed in order togive effect to the proposed modifications.

The Executive Directors wish to take this opportunity to express their great apprecia-tion of the outstanding contribution made by the Staff of the Fund at all levels in theimplementation of the Governors' Resolution. Working under intense pressure, sustainedfor more than six months, they have at all times given the Executive Directors the benefitof their skill and experience.

PART I

The New Facility

1. General Comments

The Resolution adopted by the Board of Governors at its Rio de Janeiro Meetingenvisaged the establishment in the Fund of a new facility based on special drawing rightsto meet the need, as and when it arises, for a supplement to existing reserve assets. Thechanges in the Introductory Article and the addition of Articles XXI through XXXII andSchedules F, G, H, and I, which are included in the Proposed Amendment, will achievethis purpose, and under them the Fund will acquire an important new function in theinternational monetary system. The new provisions also deal with the relationship of thenew facility to the present functions of the Fund. However, the provisions of the Articlesof Agreement, as amended, will constitute a single legal document.

As requested by the Rio de Janeiro Resolution, the Executive Directors, in draftingthe modifications in the Articles of Agreement that would establish the new facility, haveworked on the basis of the Outline attached to that Resolution. The Outline sets forththe main features of the new facility and several of its more detailed characteristics. Itwas, however, intentionally less than a complete plan of the facility, and the ExecutiveDirectors have had to elaborate certain aspects of the facility that were treated in theOutline only in a very general way. This applied, for example, to the establishment of theGeneral and the Special Drawing Accounts, the terms on which the General Account mayhold and use special drawing rights, the provision relating to "other holders," the can-cellation of special drawing rights, the payment of interest, the levying of charges, with-drawal from the facility, and its liquidation. It was also necessary to provide in detail forthe effects on the organizational structure of the Fund that follow from the fact that,while all members are entitled to become participants in the new facility, they are notrequired to participate. However, it has not been felt necessary to include in the ProposedAmendment a provision corresponding to Paragraph III. 3 (d) of the Outline under whichthe Executive Directors are to review the operations of the Special Drawing Accountand the adequacy of global reserves as part of their Annual Report to the Board ofGovernors. On the analogy of Article XII, Section 7, and Section 10 of the By-Laws, thisrequirement will be included in the By-Laws.

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2. The Special Drawing Account

Under the Articles of Agreement as amended, there will be maintained in the Fund twoseparate Accounts, a General Account and a Special Drawing Account. The Fund willcarry on its present operations and transactions, including those of an administrativecharacter, through the General Account, and its functions relating to special drawingrights through the Special Drawing Account. There will be a corresponding separation ofassets and property as well as liabilities and obligations.

Operations and transactions involving the acceptance or holding of special drawingrights by the Fund in the General Account or the use of special drawing rights thus heldwill be carried out through and recorded in both Accounts.

The separation of the two Accounts does not create a new legal entity. The Fund willcontinue to be the same institution with a single international personality.

3. Participation in the Special Drawing Account

Participation in the Special Drawing Account will be open to members of the Fundand only to them. Each member of the Fund will continue to be entitled to take part inGeneral Account operations and transactions, but in order to become a participant in theSpecial Drawing Account a member will have to deposit with the Fund an instrumentsetting forth that it undertakes all the obligations of a participant in the Special DrawingAccount in accordance with its law and that it has taken all steps necessary to enable itto carry out all these obligations. No member will become a participant, however, beforethese instruments have been deposited by members that have at least 75 per cent of thetotal quotas in the Fund.

Participation in the Special Drawing Account will involve the assumption of both finan-cial and nonfinancial obligations. The basic financial obligation that each participant willassume will be the obligation under Article XXV, Section 4, to provide currency con-vertible in fact, when the participant is designated by the Fund, to another participantusing its special drawing rights, up to a total net amount equivalent to twice the netamount of special drawing rights allocated to the designated participant. The participantproviding currency will receive an equivalent amount of special drawing rights. Thecircumstances in which a participant will be designated to provide currency are set forthin Article XXV, Section 5, and Schedule F.

A participant whose Governor did not vote in favor of a decision under which alloca-tions of special drawing rights are being made will not have to receive allocations underthat decision if it does not wish to do so. A participant will be required to receive specialdrawing rights allocated to it if its Governor voted in favor of the decision under whichthe allocations are made. Accordingly, a participant that wishes to receive special drawingrights to be allocated to it under a decision and that needs parliamentary or other legalauthorization in order to be able to meet the financial obligation assumed under ArticleXXV, Section 4, should obtain, prior to the adoption of the relevant decision to makeallocations, the necessary authorization.

The domestic legal steps that each member will need to take in order to enable it tocarry out the obligations of a participant, both financial and nonfinancial, will have to bedetermined by the authorities of the member in accordance with its own constitutionaland other legal requirements. One way in which a member will be able to put itself intoa position to meet its obligations under Article XXV, Section 4, to provide currency willbe to give its central bank the power to acquire and hold special drawing rights withoutlimitation, thus obviating any need for further legal action from time to time. Central

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banks in many countries already have authority to acquire gold and some or all forms offoreign exchange.

An alternative course would be for a member to seek parliamentary or other legalauthority, as may be necessary, for a specified amount, e.g., authority to receive alloca-tions equal to not less than 50 per cent of quota with the consequent obligation to providecurrency up to a total net amount at least equal to its quota.

4. Holders of Special Drawing Rights Other than Participants

Allocations of special drawing rights may be made only to participants, but the holdingof such rights is not restricted to participants. Article XXIII, Section 2, authorizes theFund itself to accept and hold special drawing rights in, and use them through, theGeneral Account. Detailed provisions with respect to these operations and transactionsare contained in Article XXV, Section 7.

Section 3 of Article XXIII foresees the possibility that the Fund may permit others toaccept, hold, and use special drawing rights. Under this provision the Fund, by an85 per cent majority of the total voting power, will be able to permit nomnembers andmembers that are not participants to engage in operations and transactions involvingspecial drawing rights. Other holders that the Fund could authorize to engage in theseoperations and transactions would be institutions that perform one or more functions of acentral bank for more than one member. Regional organizations in which members ortheir central banks pool some of their reserves and the Bank for International Settlementsare considered to fall within this description. The expression "operations and transac-tions" in Article XXIII, Section 3, will cover the operations and transactions of a centralbanking character engaged in by the organizations referred to in this section.

The Fund has the power to prescribe, by an 85 per cent majority, the terms and condi-tions for the operations and transactions between participants and these other holders,but these terms and conditions must be consistent with the provisions of the Articles. Inexercising this power the Fund will necessarily be guided by the nature of special drawingrights as a supplement to existing reserve assets and by the desirability of ensuring theirproper use. Under this power the Fund will be able to prescribe, where it is foundappropriate, that operations and transactions between participants and other holders willbe subject to the requirement of need which is discussed in section 15 below. It isexpected that normally the requirement of need will be prescribed as part of the terms andconditions for transactions in which participants use special drawing rights to obtaincurrency from other holders.

5. Recording and Information

Article XXII, Section 3, provides that all changes in holdings of special drawing rights,whether the result of allocations and cancellations or of operations and transactions, willbecome effective only when recorded by the Fund in the Special Drawing Account. Thiswill apply not only to operations and transactions between participants but also to opera-tions and transactions between other holders and participants. The Fund will recordchanges resulting from operations and transactions that are in conformity with the obliga-tions of participants under the provisions of the Articles or any terms and conditionsprescribed by the Fund under these provisions. To enable the Fund to carry out thistask, participants are required to inform the Fund of any operation or transactioninvolving special drawing rights that they enter into and to indicate at the same time theprovisions of the Articles under which the operation or transaction is entered into. Theobligation falls on both parties to the operation or transaction if they are participants.

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It is expected that a similar requirement will be included in the terms and conditions forother holders.

6. Principles Governing Allocations and Cancellations

Article XXIV, Section l(a), states the basic principle which is to govern all decisionsto allocate or cancel special drawing rights. This principle is that the Fund must seek tomeet the long-term global need, as and when it arises, to supplement existing reserveassets, in a manner that will promote the attainment of the Fund's purposes as set forthin Article I, and will avoid economic stagnation and deflation as well as excess demandand inflation in the world.

7. First Decision to Allocate Special Drawing Rights

Article XXIV, Section l(b), provides that the first decision to allocate special draw-ing rights shall be based on the principles that guide all decisions to allocate special draw-ing rights, and in addition, that it shall take into account certain special considerations.The first of these special considerations is a collective judgment that there is a globalneed to supplement reserves. The term "collective judgment" reflects the requirement ofan 85 per cent majority of the total voting power for the adoption by the Board ofGovernors of decisions to allocate special drawing rights. The other special considerationsare the attainment of a better balance of payments equilibrium and the likelihood of abetter working of the adjustment process in the future. While the situation of all membersis relevant to a judgment with respect to the attainment of a better balance of paymentsequilibrium, the judgment to be made at the time will necessarily be influenced pre-dominantly by the situation of members that have a large share in world trade andpayments.

8. Allocation and Cancellation

Special drawing rights will be allocated or cancelled over periods, referred to in theArticles as "basic" periods, which normally will be five years in duration and which willrun consecutively. Allocations to participants will be made at yearly intervals and onthe basis of their quotas on the date of the relevant decision to allocate, unless the Funddecides that allocations are to be made at different intervals or are to be based on quotasat different dates.

The concept of consecutive basic periods has been introduced for technical reasonsand does not prejudice the exercise by the Fund of its discretion to allocate special drawingrights, or to cancel special drawing rights, or to do neither. The Fund will exercise itsdiscretion on the basis of the judgment it forms on the need to supplement existing reserveassets. It will be possible to have basic periods in which there are neither allocations norcancellations. A basic period can be an "empty period," either because the Governorshave approved a proposal by the Managing Director that no allocation or cancellationshould be made, or because the Managing Director, having ascertained that there is nobroad support for a proposal that would be consistent with the requirements of theArticles, has been unable to make a proposal, or because a proposal by the ManagingDirector to allocate or to cancel has failed to command the required majority.

A member that becomes a participant after a basic period has started will not receiveallocations during that basic period, unless the Fund decides that the member will startto receive allocations beginning with the next allocation after it becomes a participant.It is expected that normally the Fund will so decide.

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9. Decisions on Allocations and Cancellations

Under Article XXIV, Section 4(a), and Article XXVII(a)(i), decisions to allocateor cancel special drawing rights may be made only by the Board of Governors and onlyby an 85 per cent majority of the total voting power. These decisions may be made bythe Governors only on the basis of proposals of the Managing Director concurred in bya decision of the Executive Directors.

The Managing Director is required to make proposals at certain times and in certaincircumstances. Whenever he is required to make proposals but he reaches a conclusionthat there is no proposal that would be consistent with the principles and considerationsgoverning allocation and cancellation that would have broad support among participants,he must submit a report to both the Board of Governors and the Executive Directors.

10. Operations and Transactions in Special Drawing Rights

As stated in Article XXV, Section 1, special drawing rights may be used only in theoperations and transactions authorized by or under the provisions of the Articles. Theterm "transactions," as used in Articles XXI through XXXII, refers to uses of specialdrawing rights to obtain currency. The main examples are transactions under Arti-cle XXV, Section 2. The term "operations" refers to all other uses of special drawingrights authorized by or under the Articles, such as the payment of interest, charges, andassessments under Article XXVI.

11. Receipt of A llocations

Article XXIV, Section 2(e), requires each member that has become a participant toaccept an allocation of special drawing rights unless its Governor voted against or didnot vote on the decision under which the allocation is to be made and, prior to thefirst allocation under that decision, the participant has given the Fund notice that it doesnot wish to receive the allocation. In other words, a participant whose Governor did notvote affirmatively may "opt out" of allocations under a decision (i.e., may choose not toreceive special drawing rights and incur the corresponding obligations) by giving notice tothat effect.

A participant that has opted out with respect to a basic period may "opt back in" (i.e.,resume receiving allocations) with the permission of the Fund, but the participant willreceive only the allocations made after it has been permitted to opt back in. Opting backin is not possible with respect to allocations that were made previously during the basicperiod. It is expected that the Fund will give sympathetic consideration to a request by aparticipant to opt back in.

12. Character of Special Drawing Rights

Special drawing rights will be issued by the Fund but they will not confer on par-ticipants a claim against the Fund itself to provide currency, except as prescribed by theprovisions of Articles XXX and XXXI and Schedules G and H relating to the terminationof participation and liquidation. Participants will be able to use special drawing rights toobtain currency from other participants in accordance with the provisions of Article XXV.The provisions of Article XXV require the Fund to designate participants to providecurrency to other participants using their special drawing rights in accordance withSection 2(a) of that Article, so that participants can be assured that at all times they willbe able to use their special drawing rights in a manner consistent with the provisions ofthe Articles.

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13. Designation of Participants to Provide Currency

The principles that will govern the designation of participants to provide currency toother participants using their special drawing rights in accordance with Article XXV,Section 2(a), are indicated in the three subsections of Section 5(a) of the same Article.However, this listing is not exhaustive; the Fund may supplement these principles withother principles.

As regards the order of priority between designations under subsections (a)(i) and(a)(ii) of Section 5 and among the three categories mentioned in subsection (a)(ii),subsection (a)(iii) prescribes that priority shall normally be given to those participantsthat need to acquire special drawing rights to meet the objectives of designation undersubsection (a)(ii). Thus, it may be assumed that, as a general rule, the Fund willdesignate participants under subsection (a)(ii) if there are participants that need specialdrawing rights in order to comply with the reconstitution requirements of Schedule G, toreduce a negative balance (i.e., the amount of special drawing rights that the participantowes the Fund because, at the time of a cancellation, it did not hold an amount of rightsequivalent to its share of the cancellation), or to offset the effect of a failure to fulfill theexpectation referred to in Article XXV, Section 3(a), on the requirement of need forthe use of special drawing rights.

The Outline contained two possible criteria to guide designation among participantswith a sufficiently strong balance of payments and reserve position: (i) the ratios ofthese participants' holdings of special drawing rights to their gross reserves, and (ii) theratios of such holdings in excess of net cumulative allocations to gross reserves.

The Executive Directors have examined the relative merits of these two criteria. Theexcess holdings criterion is expected, on balance, to offer significant advantages in itsapplication and to give the new facility a broad basis for designation consistent with theuniversal approach of the scheme, thereby contributing to the confidence of participantsin the new instrument of special drawing rights. At the same time the Executive Directorsconsidered a certain flexibility to be desirable for the future, and they have thereforeprovided in Article XXV, Section 5(c), for a review of the rules for designation beforethe end of each basic period, in order to enable the Fund to adopt new rules if it deems thisto be desirable. The Executive Directors have also considered that the results of a systemof designation will depend not only on the choice of a criterion to determine the target dis-tribution of holdings of special drawing rights among participants but also on the selectionof the participants that should be subject to designation and on the particular formulaused to aim over time at harmonization of individual ratios.

Accordingly, Schedule F envisages that participants shall be designated for suchamounts as will promote over time equality in their ratios of excess holdings of specialdrawing rights to their holdings of gold and foreign exchange. Because initially theseratios will be zero for all participants, paragraph (b) (i) of the Schedule indicates thatparticipants will be designated in amounts that are proportionate to their official holdingsof gold and foreign exchange. With the passage of time situations are likely to arise inwhich such ratios for one or more participants subject to designation may be significantlybelow those of the majority of other participants in the group. Paragraph (b)(ii) there-fore envisages a designation process which will tend to reduce gradually the differencebetween low and high ratios among participants subject to designation, in order to avoidsudden and massive designation of participants with relatively low ratios. The inten-tion is that such participants, once their position permitted their being made subject todesignation, would be designated, to the extent that the volume of designation permits, in

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amounts calculated to raise their ratios at a steady pace within approximately one yearto the vicinity of the ratios that are relatively high. The formula for doing this will bedetermined from time to time by the Fund. Any amounts not designated in accordancewith this formula would normally be assigned to the other participants subject to designa-tion under subsection (a)(i) of Article XXV, Section 5, in a manner consistent with theobjective of a harmonization of ratios.

The Fund will exercise its power of designation in a manner that will ensure thatparticipants will be able to use their special drawing rights in order to obtain currency.Thus, if a designated participant were to fail to provide currency to a participant usingits special drawing rights in accordance with Article XXV, Section 2(a), the Fund wouldmake any necessary additional designations.

14. Transactions not Requiring Designation

Under Article XXV, Section 2(b)(ii), the Fund is given the power to prescribetransactions in which a participant may engage in agreement with any other participantwhether designated or not. The provision contains a list of transactions that the Fundmay prescribe. The prescription of these transactions may be made by a decision or byrules and regulations adopted by the Executive Directors. The Fund is given discretionto specify transactions from among those listed. It may specify all or none of the cate-gories listed; or it may specify individual transactions in one or more of the categories.By an 85 per cent majority in the Board of Governors, additional transactions or cate-gories of transactions outside the categories in the list may be prescribed. UnderArticle XXV, Section 2(b)(ii), a principle is established for the adoption of decisionsunder that provision. These decisions of the Fund must be consistent with the provisionsof the Agreement and with the proper use of special drawing rights under the Agreement;participants will be expected to observe this principle and avoid engaging in transactionswithout designation which might prejudice basic features of the scheme such as therequirement of need.

Article XXV, Section 2(b) (i), expressly exempts certain transactions from designation.The Fund may prescribe any necessary rules and regulations under Article XII,Section 2(g), in order to implement this provision.

15. Requirement of Need

As a general rule, a participant will be expected to use special drawing rights in trans-actions with other participants only if it has a need as defined in Article XXV,Section 3(a). Section 4 of this Report deals with the requirement of need in operationsand transactions in which participants obtain currency from other prescribed holders.

The definition of need given in Article XXV, Section 3(a), covers all balance ofpayments needs, whether these arise from current or capital transactions. Because theseneeds can be defined in various ways, reference is also made to "developments in its[a participant's] official holdings of gold, foreign exchange, and special drawing rights,and its reserve position in the Fund," to indicate that these developments, even if attribut-able to conversions of balances of the member's currency and not to a balance ofpayments deficit, may give rise to a need to use special drawing rights. Use of specialdrawing rights merely to reduce holdings of such rights while the total of holdings ofgold and foreign exchange and the reserve position in the Fund is increasing or wouldincrease as a result of such use would not be regarded as meeting the requirement ofneed. However, the use of rights to meet a payments need may have the incidental

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effect of changing the relative proportions in which a participant holds different reserveassets.

16. Transactions without Requirement of Need

Under Article XXV, Section 3(c), the Fund is authorized to prescribe transactionsin which participants may use special drawing rights without fulfilling the requirementof need. The categories of transactions listed in that provision are the same as thoselisted in Article XXV, Section 2(b)(ii), but, in contrast to the exemptions from therequirement of designation, the list is exhaustive and the Fund cannot prescribe transac-tions that go beyond its scope. As in the case of the prescription of transactions that arenot subject to designation, prescriptions under Article XXV, Section 3(c), may be madeby a decision or by rules and regulations adopted by the Executive Directors, and mayrelate to individual transactions or categories of transactions falling within the listedcategories. The transactions exempted by prescription from the requirement of need donot have to coincide at any given time with those that are exempted from the require-ment of designation. In prescribing transactions or categories of transactions that areexempted from the requirement of need the Fund will take into account the extent towhich a participant has to obtain special drawing rights for the purpose of meetingthe objectives of Section 3(c) of Article XXV.

17. Reconstitution

Under the reconstitution principles set forth in Article XXV, Section 6, and Schedule G,a participant's net use of its special drawing rights must be such that the average of itsdaily holdings of special drawing rights over a five-year period will not be less than30 per cent of the average of its daily net cumulative allocations of special drawingrights over the same period. It is envisaged that the Fund will assist participants tocomply with this requirement through designation under Article XXV, Section 5(a)(ii),and rules to that effect will be adopted by the Fund. If a participant is unable to obtainsufficient special drawing rights through designation, it must obtain them from theGeneral Account or from another participant specified by the Fund for this purpose tothe extent that the General Account is unable to supply them.

The reconstitution rules set forth in Schedule G will be reviewed by the Fund beforethe end of each basic period. The Board of Governors by an 85 per cent majority ofthe total voting power may adopt, modify, or abrogate rules for reconstitution.

18. Operations and Transactions through the General Account

The principal provisions governing the acceptance and use of special drawing rightsby the Fund in operations and transactions conducted through the General Account areset forth in Article XXV, Section 7. These provisions impose an obligation on the Fundto accept special drawing rights in two specified cases in which the provisions of theArticles require payments to be made to the Fund in special drawing rights. However,the Fund will have authority to accept, to the extent that it may decide, special drawingrights in the General Account in the cases indicated in subsection (c) of Section 7.

Subsections (d), (e), and (f) describe the circumstances in which the Fund will beauthorized to use special drawing rights held in the General Account to obtain currenciesfrom participants. Under subsection (d) the Fund may require a participant to provideits currency to the Fund for special drawing rights, if the Fund deems it appropriate toreplenish its holdings of the participant's currency in the General Account and hasconsulted the participant on alternative ways of replenishment under Article VII,

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Section 2. Under subsection (f) the Fund may use special drawing rights only byagreement with the participant involved in the operation or transaction.

In order to assist a participant to meet its need for special drawing rights to carry outthe objective of reconstitution, to eliminate any negative balance, or to reverse the effectsof a transaction engaged in inconsistently with the rule of need, subsection (e) authorizesthe Fund to provide this participant with special drawing rights from the General Accountfor gold or currency acceptable to the Fund.

19. Exchange Rates

Under Article XXV, Section 8, the exchange rates for operations and transactionsare to be such as will ensure that a participant using its special drawing rights will receivethe same value, on the basis of the exchange rates prevailing at the time the transactiontakes place, whatever the currencies that might be provided and whichever the participantthat provides the currency. The Fund will have to adopt regulations to give effect tothis principle, and will consult a participant on the procedure for determining rates ofexchange for its currency.

The rates prescribed under Article XXV, Section 8, will not apply to operations andtransactions in special drawing rights with the General Account. Those operations andtransactions will be executed at the rate at which the Fund holds the currency involved,which normally is the par value of the currency.

20. Interest and Charges

Under the provisions of Article XXVI, the rate of interest and the rate of charges willbe the same. The net effect of these provisions will be the payment of interest by theFund to a participant on the excess of its holdings of special drawing rights over its netcumulative allocation, and the payment of charges by a participant on the amount bywhich its holdings of special drawing rights are less than its net cumulative allocation.As a matter of accounting practice, the amount of interest to be paid to a participant andthe amount of charges to be paid by that participant will be offset and only the balancewill be paid or collected, as the case may be, by the Fund. Interest and charges will bepayable in special drawing rights.

Section 3 of Article XXVI sets the rate at 1 % per cent per annum, but the Fund isgiven authority to apply a different rate within maximum and minimum levels. Underthis authority, the Fund could set the rate at the same level as the remuneration to bepaid to members under Article V, Section 9, but it will not be required to do so.

If a participant does not have sufficient special drawing rights to meet the paymentof charges, it will be able to obtain special drawing rights from the General Account orfrom another participant specified by the Fund for this purpose to the extent that theGeneral Account is unable to supply them.

21. Expenses of the Special Drawing Account

The expenses of conducting the business of the Special Drawing Account are to bemet by the Fund from the resources held in the General Account. However, underArticle XXII, Section 2, the Fund will be reimbursed periodically on the basis of areasonable estimate of these expenses. For the purpose of such reimbursement, the Fundwill levy assessments under Article XXVI, Section 4, on all participants in proportionto their net cumulative allocations. The amounts assessed will be paid directly into theGeneral Account and, like interest and charges, will be payable in special drawing rights.

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22. Administration of the Special Drawing Account

Because participation may not be coextensive with membership in the Fund,Article XXVII contains special rules for calling meetings, determining quorums, andvoting majorities for the Board of Governors and the Executive Directors of the Fundwhen these organs consider matters pertaining to the Special Drawing Account. Thereis no change in the composition of these two organs of the Fund. All Governors andDirectors remain entitled to attend and participate in all meetings and in the discussionof any item on the agenda. However, if a decision is to be taken on an item thatpertains exclusively to the Special Drawing Account, for example, on a proposal by theManaging Director to allocate or cancel special drawing rights, only Governors formembers that are participants may vote and each Director will be able to cast only thevotes of the Fund members appointing or electing him that are participants. It is, there-fore, possible that a Director will not have any votes to cast. Similarly, whether aGovernor or Director may cast votes on an item pertaining exclusively to the SpecialDrawing Account will determine whether he may put an item on the agenda, whetherhe may request that a meeting be called, and whether there is a quorum for any meeting.

There is no special provision in Article XXVII regarding the voting power of membersthat are participants for the purpose of decisions on matters relating to the Special Draw-ing Account. There is no need for such a provision because the voting power of thesemembers will be determined for all purposes by the present provisions of Article XII,Section 5. Accordingly, for the purposes of the Special Drawing Account as well, eachparticipating member will have 250 votes plus one vote for each part of its quota equiva-lent to one hundred thousand U.S. dollars.

Decisions on certain important issues that require an 85 per cent majority of the totalvoting power as well as a decision to liquidate the Special Drawing Account can betaken only by the Board of Governors. These issues are those relating to the prescriptionof other holders, the allocation and cancellation of special drawing rights, the prescrip-tion of additional transactions not requiring designation, and the amendment or abroga-tion of reconstitution rules.

23. Suspension of Participants' Use of Special Drawing Rights

Article XXIX, Section 2(f) , makes it clear that the suspension of a participant's useof special drawing rights pursuant to the provisions of that Article will not affect, inany way, its right as a member to make use of the resources of the Fund in the GeneralAccount, and conversely, any limitation of this right of a member that is a participantwill not affect, in any way, the participant's right to use its special drawing rights.

24. Definition of Currency Convertible in Fact for Transactions inSpecial Drawing Rights

The provisions of Article XXXII (b) are designed to ensure that any participant usingspecial drawing rights to obtain "currency convertible in fact" from a designated partici-pant can obtain, directly or indirectly, any one of a number of convertible currenciesthat he may choose, in amounts determined by the exchange rates prescribed underArticle XXV, Section 8, in accordance with the principle of equal value.

This objective is to be achieved by establishing a group of currencies which will beinterconvertible at appropriate rates of exchange for balances arising in connection withthe use of special drawing rights. Only currencies with respect to which there are proce-dures designed to ensure this interconvertibility to the satisfaction of the Fund and which

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in addition are convertible in the sense that they are the currencies of participants thatfreely buy and sell gold under Article IV, Section 4(b), or have accepted the obligationsof Article VIII, Sections 2, 3, and 4, will qualify for inclusion in this group.

In addition to the currencies mentioned in the preceding paragraph, currency converti-ble in fact will also include balances of any other currency for which suitable arrangementsexist for conversion, at rates of exchange prescribed by the Fund, into any of the curren-cies in the group that are interconvertible. Through one or more conversions, suchbalances can in fact be converted into any of the currencies in the group.

25. Definition of Reserve Position in the Fund

Article XXXII(c) defines a participant's "reserve position in the Fund" as the sumof the gold tranche purchases that the participant could make and the amount of anyFund indebtedness to the participant which is "readily repayable" under a loan agree-ment. Examples of the latter are the indebtedness of the Fund to participants in theGeneral Arrangements to Borrow and the indebtedness to Italy under the 1966 LoanAgreement, both of which have been entered into under Article VII, Section 2. Membersthat have made loans to the Fund under these agreements may obtain early repaymentby representing to the Fund that there is a balance of payments need for repayment andrequesting such repayment.

26. Termination of Participation

The principles governing termination of participation in the Special Drawing Account,which are set forth in Article XXX and Schedule H, are generally the same as thosegoverning the settlement of accounts on withdrawal of a member from membership inthe Fund. A participant may terminate its participation in the Special Drawing Accountat any time without withdrawing from membership in the Fund. Withdrawal from theFund automatically terminates participation in the Special Drawing Account.

27. Liquidation

The principal issue in devising any procedure for liquidation is the distribution of theburden of any default. Article XXXI and Schedule I distribute the burden of defaultamong all participants on the basis of their net cumulative allocations. This is accom-plished by a system of liquidation under which the Fund redeems special drawing rightsfirst from the participant that holds the largest amount in proportion to its net cumulativeallocation until this proportion is reduced to that of the participant with the second highestproportion. The Fund then redeems special drawing rights held by these two participantsuntil the proportion held by each is reduced to that of the participant with the thirdhighest proportion and so on until all amounts paid in the Fund by participants have beendistributed. Thus a participant's share of any possible default does not increase as itsholdings of special drawing rights increase above its net cumulative allocation.

PART II

Modifications in Rules and Practices of the Fund

28. General Comments

Board of Governors Resolution No. 22-8, which called on the Executive Directors topropose amendments to the Articles and the By-Laws of the Fund for the purpose of

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establishing the new facility based on special drawing rights, also requested the ExecutiveDirectors to consider at the same time and report on possible improvements in the presentrules and practices of the Fund based on developments in world economic conditionsand the experience of the Fund since the adoption of its Articles of Agreement. TheExecutive Directors have considered various suggestions for improvements and havedecided to recommend the introduction of certain changes in the present rules and prac-tices of the Fund, all of which would be made by amending the Articles. These changesrelate to: certain quota increases and associated matters; uniform proportionate changesin par values and the maintenance of the gold value of the Fund's assets in the event thatsuch changes in par values are made; the use of the Fund's resources in the gold tranche,including use for capital transfers; a limitation on the Fund's power to introduce newfacilities in the General Account for the unconditional use of the Fund's resources; therules on repurchase under Article V, Section 7; the payment of a remuneration tomembers whose currencies are held by the Fund in amounts less than 75 per cent ofquota; the distribution of net income; and the interpretation of the Articles of Agree-ment. The modifications in Articles I, III, IV, V, VI, XII, XVIII, and XIX, and inSchedule B, which are included in the Proposed Amendment, are intended to give effectto these changes.

Three general points should be made in connection with these modifications. First,some of them represent no more than a clarification or codification of practices developedover the years and followed currently by the Fund on the basis of the Articles of Agree-ment in their present form. Secondly, some modifications are intended to adapt theArticles to the fact that there will be a facility which will make it possible to allocatespecial drawing rights of an unconditional character. Finally, while one of the effects ofthese modifications will be to prevent the establishment of new facilities for the uncondi-tional use of the Fund's resources, they are not intended to make the rules and practicesrelating to the use of the Fund's resources more restrictive than they are at thepresent time.

29. Quota Changes and Related Matters

Under Article III, Section 2, in its present form, all changes in quotas require a four-fifths majority of the total voting power. Under the Proposed Amendment decisions onchanges in quotas, including special increases and increases by installments, proposedas the result of a general review will require a new special majority, i.e., 85 per cent ofthe total voting power. The general reviews referred to in the amended provision arethose that have as their purpose an examination of the appropriateness of the quotas ofall members, and they will include not only the reviews of the quotas of all memberswhich the Fund is required to conduct at intervals of five years but also any reviews ofthis kind conducted at other times. All other changes in quotas will continue to requirea four-fifths majority of the total yoting power.

The majority of 85 per cent will also apply to decisions specifying conditions precedentto the effectiveness of quota increases proposed as a result of a general review. Theadoption of these conditions is subject at present to the four-fifths majority which isapplicable to quota increases. Examples of such conditions drawn from past practice arethe requirement of a minimum total participation in a general increase and the paymentof the additional subscriptions before the increases become effective. As at present, thepower to adopt these conditions will be exercised by the Board of Governors as a reservedpower.

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Under a new provision, Article III, Section 4(c), an 85 per cent majority will berequired for decisions on other matters that are related to quota increases proposed asthe result of a general quota review even though they do not involve conditions precedentto the effectiveness of the increases. These decisions include any decision pursuant toArticle III, Section 4(a), under which a member may be permitted to pay less than25 per cent of its additional subscription in gold. The new provision will also applyto any decision intended to mitigate the effects of the payment of additional subscriptions.At present, the Articles provide that all of these decisions are to be made by theExecutive Directors by a majority of the votes cast. After the Proposed Amendmententers into force the power to make such decisions will be reserved to the Board ofGovernors.

The special majority of 85 per cent of the total voting which will be required as theresult of various changes in the rules and practices of the Fund is analogous to themajority required for a number of important decisions under the new facility based onspecial drawing rights.

30. Uniform Proportionate Changes in Par Values and Maintenance of Gold Value

Under the modifications in Article IV, Section 7, a decision to make a uniformproportionate change in par values also will require an 85 per cent majority of the totalvoting power. This changes the present provision in two respects. It replaces the simplemajority with a special majority and eliminates the requirement that the uniform propor-tionate change be approved by those members that have 10 per cent or more of thetotal of Fund quotas. The power to make a uniform proportionate change in par valueswill continue to be reserved to the Board of Governors.

Under the modifications in Article IV, Section 8(d), and Article XII, Section 2(b)(iii), a decision to waive the maintenance of the gold value of the Fund's assets in theevent of a uniform proportionate change in par values will require an 85 per centmajority of the total voting power, and the power to make the decision will be reservedto the Board of Governors. At present the power to make a decision of this kind is notreserved to the Board of Governors and a special majority is not required.

31. Temporary Character of Use of the Fund's Resources

The modifications in Article I and the inclusion in Article V of a new Section 3(c)state expressly what is regarded as implicit in the present Articles, i.e., that use of theFund's resources must be of a temporary character and that the Fund must adopt policiesintended to encourage members to take measures that will help them to avoid a use whichis not of such a character. In this way the Fund safeguards the revolving character ofits resources. Therefore, no changes in the established policies and practices of the Fund,as set forth in the Fund's decision of February 13, 1952, and in other decisions wouldbe called for by the entry into force of the Proposed Amendment. The resources of theFund referred to in Article I(v) and in other provisions of the Articles are those thatwill be held by the Fund in the General Account.

32. Legal Automaticity of Gold Tranche Purchases

Requests for gold tranche purchases now enjoy de facto automaticity. One of theeffects of the modifications in Article V, Section 3, will be to make the use of the Fund'sresources in the gold tranche legally automatic.

After the amendment, the use of the Fund's resources in the gold tranche will continueto be subject to the provisions of Article V, Section 3(a). Accordingly, members making

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requests for purchases in the gold tranche will still be required to make the representa-tion of need prescribed by Article V, Section 3(a) (i). However, the Fund will not havethe legal power to challenge this representation.

Article V, Section 3(a)(ii i) , will be amended to eliminate the necessity for a waiverthat might have been required for a gold tranche purchase in certain circumstances.Furthermore, Article VI, Sections l(a) and 2, as amended, will remove the presentlimitation on making gold tranche purchases for meeting capital transfers. A memberwill be able to make gold tranche purchases even though they are to meet what mightbe regarded as a large or sustained outflow of capital. The established legal positionwill be maintained in respect of requests for purchases other than gold tranche purchases.Accordingly, a member will be able, as at present, to use the Fund's resources to meetcapital outflows subject to Article VI, Section 1.

The legal automaticity of gold tranche purchases will not prejudice the application ofthe Fund's policies on the currencies to be used in purchases. These policies are setforth in the Fund's Decision of July 20, 1962 and are applicable to all purchases includ-ing gold tranche purchases.

The legal automaticity of gold tranche purchases raises the question of possible misuseby a member of its right to make such purchases without challenge by failing to observethe principle of need set forth in Article V, Section 3(a)( i ) . The Executive Directorsbelieve that if the question should arise it could be met by an adjustment, in due time,of the Fund's policies with respect to the currencies to be used in purchases in order tobring about a correction of the effects of any misuse by a member of the kind referredto above.

The Fund will continue to have authority under the Articles of Agreement to declarea member ineligible to use the Fund's resources even in the gold tranche if the membermakes gold tranche purchases without observing the principle of need.

33. Definition of Gold Tranche Purchases

The changes in the Articles commented upon in sections 32, 34, and 36 of this Reportshould be understood in the light of the definition of gold tranche purchases in a newprovision, Article XIX(j). This definition is somewhat different from the definition ofgold tranche purchases which prevailed in Fund practice until less than two years agoand according to which a gold tranche purchase was understood as a purchase whichdid not cause the Fund's holdings of a member's currency to exceed 100 per cent ofits quota. By permitting the exclusion of purchases under the compensatory financingfacility and the holdings of currency acquired by the Fund as a result of those purchases,the definition in Article XIX(j) will make it possible for the Fund to continue the presentpractice of treating the compensatory financing facility as separate for the purpose ofapplying the Fund's policies on the use of its resources. This practice was introduced bythe amendments to the Decision on Compensatory Financing of Export Fluctuationsadopted on September 20, 1966, under which the Fund applies "its tranche policies todrawing requests:by a member as if the Fund's holdings of the member's currency wereless than its actual holdings of that currency by the amount of any drawing outstandingunder paragraph '(5)" of that decision.

Under the definition in Article XIX(|)r a purchase under paragraph (5) of thecompensatory financing decision will not be regarded as a gold tranche purchase evenif ft does not raise the Fund's holdings of a member's currency above the level of themembeiys quota. Conversely, a purchase not under the compensatory financing facility

147



which raises the Fund's holdings above that level will be regarded as a gold tranchepurchase,* provided that the amount by which the quota level is exceeded will not belarger than the amount of any purchases outstanding under the compensatory financingdecision.

In view of the possibility that, under the definition of gold tranche purchases inArticle XIX(j), a gold tranche purchase may increase the Fund's holdings above thequota level and in order to preserve the legal automaticity of requests to make goldtranche purchases under Article V, Section 3(d), the text of Article V, Section 3(a) (iii),is amended so that a waiver under Article V, Section 4, will not be necessary. Underthe amended text of Section 3(a) (iii), however, a purchase under the compensatoryfinancing decision which, together with any other net increases in the Fund's holdingsof the member's currency, causes these holdings to increase by more than 25 per centof quota during the period of 12 months ending on the date of the purchase, willrequire a waiver under Article V, Section 4, even though it does not raise the Fund'sholdings above the quota level. At present, any purchase below the quota level, includinga purchase under the compensatory financing decision, does not require a waiver.

34. Termination of Power to Establish New UnconditionalFacilities in the General Account

As a result of the adoption of Article V, Section 3(d), the Fund will not have thepower to create any new facility in the General Account for the unconditional use of itsresources. This provision reflects the view that, with the establishment of the newfacility based on special drawing rights, any need for additions to existing reserve assetswill be met, as and when it arises, through allocations of special drawing rights. Theprovision makes it explicit that a member's representation under Article V, Section 3(a),must be examined in order to determine that the requested purchase would be consistentwith the provisions of the Articles and the policies on the use of the Fund's resourcesadopted under Article V, Section 3(c). This means that the Fund will not grant de factoautomaticity (i.e., "the overwhelming benefit of any doubt" or treatment having thesame effect) to requests for purchases other than gold tranche purchases. The Fund willcontinue to be able to adapt its policies governing purchases other than gold tranchepurchases in all other respects.

The changes in Article V, Section 3, will be without prejudice also to the Fund'scompensatory financing facility and the adjustment of that policy if this should beconsidered desirable. In addition, as already indicated, these changes are not intendedto make the rules and practices relating to the use of the Fund's resources more restrictivethan they are at present.

35. Rules on Repurchase

The modifications in Article V, Section 7, Article XII, Section 2(b), Article XIX(a)and (e), and Schedule B, will introduce the following changes in the present rules onrepurchase:

(a) At present, the amounts of a member's currency that are held by the govern-mental agencies and other official institutions of other members, as well as by banks withinthe territories of the latter, are deducted from the member's official holdings of gold andconvertible currencies under Article XIX(e). The deduction of these currency liabilitieswill be abolished, thereby introducing a gross concept of monetary reserves as the basisof the calculation of members' repurchase obligations and for certain other purposes.

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This change is effected through the modifications in Article XIX(a) and (e). The newparagraph 6 of Schedule B sets forth a transitional rule designed to prevent the accrualof repurchase obligations solely because of the elimination of the deduction of currencyliabilities during a financial year of the Fund. It will apply only in the year in whichthe Proposed Amendment enters into force and, thereafter, no deductions will be madefor currency liabilities.

(b) The abatement of repurchase obligations calculated in a member's currency,which the Fund may not accept because the acceptance would increase the Fund's holdingsof that currency above 75 per cent of the member's quota, will be eliminated. Underparagraph l(d) of Schedule B the amounts that would be abated for this reason willhave to be discharged in other convertible currencies as determined by the Fund.

(c) The present paragraph 2 of Schedule B, which will be retained as paragraph 2(a),prohibits the Fund from acquiring the currency of any nonmember by way of repurchasebut does not indicate how repurchase obligations that accrue in specified nonmembercurrencies are to be treated. The proposed paragraph 2(b) of Schedule B provides thatrepurchase obligations that accrue in specified nonmember currencies will be paid in theconvertible currencies of members as determined by the Fund. The Fund has neverspecified a nonmember currency for the purposes of repurchases but would be likely todo so if it found that members held appreciable amounts of a nonmember currency.

(d) The present Article V, Section 7(c)(i), provides that a repurchase shall not becarried out to the extent that it would reduce the repurchasing member's monetaryreserves, as presently defined on a net basis, below an amount equal to its quota. Underthe amended Article V, Section 7(c) (i), a level of monetary reserves, defined on a grossbasis, equivalent to 150 per cent of quota will be substituted for the quota level. If arepurchase obligation accrues which would exceed this limit, the excess will be abated.

(e) Under the proposed Article V, Section 7(c)(iv), there will be an annual limiton repurchases under Article V, Section 7(b), equal to 25 per cent of a member's quota.Under the new paragraph l(e) of Schedule B, if an obligation accrues which exceedsthis amount, the excess will be postponed to the end of the subsequent financial yearor years, but not more than 25 per cent of the member's quota will have to be repur-chased in any one year under postponed and other repurchase obligations accruing underArticle V, Section 7(b). This new rule will not affect repurchases made outsideArticle V, Section 7(b).

(f) A change will be introduced in the formula on the basis of which repurchaseobligations are calculated. The present formula takes account of increases in the Fund'sholdings of a member's currency and increases or decreases in its monetary reservesduring a year. Under the modified formula in Article V, Section 7(b)(i) , account willalso be taken of decreases in the Fund's holdings of the member's currency during theyear. This change will reduce a member's repurchase obligation under Article V,Section 7(b), at the end of a financial year by the full amount of other repurchasesmade during that year, whereas at present they reduce the obligation only by one half ofthe full amount. It should be noted that, in respect of repurchases outside Article V,Section 7(a) or (b), the Fund has legal authority to specify the acceptable convertiblecurrencies that the repurchasing member may use.

(g) In accordance with paragraph 5 of Schedule B, the Fund, in its discretion, willbe able to accede to a member's request that in the calculation of its monetary reservesa deduction be made for its outstanding obligations resulting from swap transactionswith other members.

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(h) The Fund will have the power to revise the percentage of quota below whichrepurchases may not reduce a repurchasing member's monetary reserves and the annuallimit on repurchases under Article V, Section 7(b). In addition, the Fund will be ableto revise and supplement, in a manner consistent with the other repurchase provisionsof the Articles, the newly introduced rules in paragraph l(c), (d), and (e) and para-graph 2(b) of Schedule B. The Fund is granted this power under Article V, Section 7(d).Under this provision and Article XII, Section 2(b)(ix), the power is reserved to theBoard of Governors which can exercise it by an 85 per cent majority of the total votingpower.

(i) Under Article XXV, Section 7(a) and (b), special drawing rights are to beincluded in the monetary reserves of members for the purposes of the Articles. As aresult of these provisions and of the modifications in the introductory parts of Article V,Section 7(b), and in paragraph 1 of Schedule B, repurchase obligations may accrue inspecial drawing rights, and the Fund will accept special drawing rights in repurchaseunder Article V, Section i^b). However, the Fund may decide that no account betaken of any increase or decrease in monetary reserves during a financial year whichis due to allocations or cancellations of special drawing rights during the same year.

36. Service Charge

Article V, Section 8(a), as amended, will maintain the existing maximum rate of theservice charge that the Fund can levy on exchange transactions. The present minimumrate for exchange transactions will be unaffected, except that the Fund will be authorizedto levy a lower charge or no charge on gold tranche purchases. The Executive Directorsbelieve that initially no service charge should be levied on gold tranche purchases, subjectto any change in this policy that would be appropriate in the light of subsequentdevelopments.

37. Remuneration

A new provision, Article V, Section 9, will require the Fund to pay a return tomembers on the excess of 75 per cent of a member's quota over the average of theFund's holdings of the member's currency, or, in other words, on the Fund's net use ofa member's normal currency subscription. The rate of remuneration will be 1 % per centper annum. However, the Executive Directors would be able to specify other rateswithin the limits of 1 to 2 per cent per annum by a majority of the votes cast., TheExecutive Directors would be able to make changes beyond these limits by a three-fourthsmajority of the total voting power, but it is not expected that this would be done unlessit were necessary in the light of developments in international money markets.

The remuneration will be payable in gold or in the member's own currency or partlyin gold and partly in that currency. The Executive Directors believe that the Fund'spolicy should be to pay remuneration in gold to the extent that receipts of gold frommembers in payment of charges under Article V, Section 8, would permit, subject againto any change in this policy that would be appropriate in the light of subsequentdevelopments.

38. Distribution of Net Income

Article XII, Section 6, in its present form, requires that, before any distribuii©n>ibfthe net income of any year is made by the Fund to all members on the basis bf quotas,a 2 per cent noncumulative payment be made to each member on the amount by which75 per cent of its quota exceeded the Fund's average holdings ofiiheimeinber's currency

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Appendix 1 (continued). EXECUTIVE BOARD DECISIONS AND REPORT

during the year. Under the amended provision, instead of the 2 per cent preferentialpayment, the Fund will have to distribute first to members eligible to receive remunera-tion under Article V, Section 9, an amount of net income which will raise to 2 per centthe return paid to them as remuneration for the year for which net income is distributed.

Under Article XII, Section 6(c), the Fund will be able to transfer to general reserveall or part of its special reserve to which the yield of its investment is placed. The yieldof the investment is not net income in the sense of, and cannot be distributed under,Article XII, Section 6. Moreover, it can be used only for the limited purpose of meetingadministrative deficits. Amounts transferred from special to general reserve, however,will be available to meet a deficit of any character, whether operational or administrative,including a deficit resulting from the payment of remuneration under Article V,Section 9, but they will continue to be unavailable for distribution as net income underArticle XII, Section 6.

The power to make transfers to general reserve from the existing or any other specialreserve will be without prejudice to any future decisions on the maintenance or termina-tion of the Fund's investment. The power to make transfers will be exercised by theBoard of Governors, and a provision reserving it to the Board of Governors is insertedas Article XII, Section 2(b)(x).

39. Interpretation

Article XVIII, as amended, will require the establishment of a standing Committeeon Interpretation of the Board of Governors. A question of interpretation of theArticles, on which the Executive Directors have given a decision under Article XVIIIand which, at the request of a member made within three months from the date of thatdecision, is referred to the Board of Governors, will have to be considered first by thisCommittee. The decision of this Committee will be regarded as the decision of theBoard of Governors, and therefore final, unless the Board of Governors decides otherwiseby an 85 per cent majority of the total voting power. Article XVIII(b) prescribes thateach member of the Committee on Interpretation shall have one vote. Other matters,such as the membership, procedures, and voting majorities of the Committee, are leftfor later determination by the Board of Governors by means of a By-Law. In addition,under Article XXVII(c), the Board of Governors will have the power to determinewhether all members of the Committee will be entitled to vote on a question of interpre-tation pertaining exclusively to the Special Drawing Account.

PART III

Procedure

40. Applicable Legal Provisions

The procedure for the adoption of modifications in the Articles of Agreement is setforth in Article XVII which reads:

(a) Any proposal to introduce modifications in this Agreement, whether emanat-ing from a member, a governor or the Executive Directors, shall be communicated tothe chairman of the Board of Governors who shall bring the proposal before the Board.If the proposed amendment is approved by the Board the Fund shall, by circularletter or telegram, ask all members whether they accept the proposed amendment.

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When three-fifths of the members, having four-fifths of the total voting power, haveaccepted the proposed amendment, the Fund shall certify the fact by a formal com-munication addressed to all members.

(b) Notwithstanding (a) above, acceptance by all members is required in thecase of any amendment modifying

(i) the right to withdraw from the Fund (Article XV, Section 1);(ii) the provision that no change in a member's quota shall be made without

its consent (Article III, Section 2);(iii) the provision that no change may be made in the par value of a member's

currency except on the proposal of that member (Article IV, Section 5 (b) ).(c) Amendments shall enter into force for all members three months after the date

of the formal communication unless a shorter period is specified in the circular letteror telegram.

41. Resolution of Board of Governors

Annex A contains the text of a Resolution, and there is attached to it a ProposedAmendment to the Articles of Agreement. The Chairman of the Board of Governorshas requested that on his behalf the Secretary of the Fund bring the Resolution andProposed Amendment before the Board of Governors for its approval. Pursuant tothis request the Secretary is transmitting them to the Board with this Report.

In the judgment of the Executive Directors the action requested of the Board ofGovernors should not be postponed until the next regular meeting of the Board anddoes not warrant the calling of a special meeting of the Board. For this reason, theExecutive Directors, pursuant to Section 13 of the By-Laws, request Governors to votewithout meeting. In accordance with established practice, the Executive Directors havealso decided to waive the requirement that no Governor shall vote until seven daysafter the dispatch of the motion. To be valid votes must be received at the seat of theFund on or before May 31, 1968.

For the adoption of the Resolution it will be necessary that replies be received froma majority of the Governors exercising two-thirds of the total voting power and that amajority of the votes cast be in favor of the Resolution. The Resolution must be votedon as a whole.

42. Acceptance of Proposed Amendment by Members

By adopting the annexed Resolution the Board of Governors will grant its approvalto the Proposed Amendment of the Articles of Agreement. Members will then be asked,by circular letter or telegram, to notify the Fund whether they accept the ProposedAmendment. The Proposed Amendment can be accepted only in its entirety. That is tosay, members will not be able to accept part only of the Proposed Amendment.

In accordance with Article XVII(a) the Proposed Amendment must be accepted bythree-fifths of the members, having four-fifths of the total voting power, before it canenter into force.

43. Entry into Force of Proposed Amendment

When the Proposed Amendment has been accepted by the necessary majority, theFund will certify the fact by a formal communication to be sent by the Secretary of theFund to all members. Pursuant to Article XVII(c), the Executive Directors recommendthat the Proposed Amendment enter into force on the date of the formal communicationinstead of three months after that date. In accordance with that provision and para-

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graph 3 of the Resolution, the circular letter or telegram by which members will beasked whether they accept the Proposed Amendment will specify the date of the formalcommunication referred to above as the date of the entry into force of the ProposedAmendment.

The Proposed Amendment will enter into force for all members on the date of theformal communication, whether they accepted the Amendment or not. Presumably,members accepting the Proposed Amendment will have taken any legislative and otheraction that may be necessary to enable them to carry out their obligations under theArticles of Agreement as amended. Other members that have not accepted the ProposedAmendment will need to consider whether any action is necessary in order to enablethem to carry out their obligations under the Articles of Agreement as amended.

44. Notification to Depositary of Articles of Agreement

Upon certification of the entry into force of the Proposed Amendment it is intendedto notify that fact to the Government of the United States, which is the depositary ofthe Articles of Agreement of the Fund, so that it may record the Amendment. It is alsointended to ask the Government of the United States to register the Amendment withthe Secretary-General of the United Nations, pursuant to Article 102 of the UnitedNations Charter.

ANNEX A

RESOLUTION

WHEREAS the Executive Directors have completed their work relating to theestablishment in the International Monetary Fund of a new facility based on specialdrawing rights in order to meet the need, as and when it arises, for a supplement toexisting reserve assets, and on improvements in the present rules and practices of theFund, pursuant to Resolution No. 22-8 of the Board of Governors of the InternationalMonetary Fund at its Twenty-Second Annual Meeting in Rio de Janeiro; and

WHEREAS the Executive Directors have prepared a Report setting forth proposalsfor modifications in the Articles of Agreement of the International Monetary Fund forthe purpose of establishing the new facility and giving effect to certain modifications inthe present rules and practices of the Fund; and

WHEREAS the Chairman of the Board of Governors has requested the Secretary ofthe Fund to bring the proposals of the Executive Directors before the Board of Governors;and

WHEREAS the Report of the Executive Directors setting forth their proposals hasbeen submitted to the Board of Governors by the Secretary of the Fund; and

WHEREAS the Executive Directors have requested the Board of Governors to voteon the following Resolution without meeting, pursuant to Section 13 of the By-Lawsof the Fund;

NOW, THEREFORE, the Board of Governors, noting the said Report of the Execu-tive Directors, hereby RESOLVES that:

1. The Proposed Amendment to the Articles of Agreement of the InternationalMonetary Fund set forth in the attachment to this Resolution is approved.

2. The Secretary of the Fund is directed to ask, by letter or telegram, all membersof the Fund whether they accept, in accordance with the provisions of

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Article XVII, the Proposed Amendment to the Articles of Agreement as setforth in the attachment to this Resolution.

3. The circular letter or telegram to be sent to all members in accordance with 2above shall specify that the Proposed Amendment to the Articles of Agreementset forth in the attachment to this Resolution shall enter into force for allmembers as of the date on which the Fund certifies, by formal communicationaddressed to all members, that three-fifths of the members, having four-fifths ofthe total voting power, have accepted the modifications.

Proposed Amendment to the Articles of Agreementof the International Monetary Fund

Prepared Pursuant to Board of Governors Resolution No. 22-8

INTRODUCTORY ARTICLE

The Introductory Article shall read:

"(i) The International Monetary Fund is established and shall operate in accordance with theprovisions of this Agreement as originally adopted, and as subsequently amended in orderto institute a facility based on special drawing rights and to effect certain other changes.

(ii) To enable the Fund to conduct its operations and transactions, the Fund shall maintain aGeneral Account and a Special Drawing Account. Membership in the Fund shall give theright to participation in the Special Drawing Account.

(iii) Operations and transactions authorized by this Agreement shall be conducted through theGeneral Account except that operations and transactions involving special drawing rightsshall be conducted through the Special Drawing Account."

B

ARTICLE I

PURPOSES

1. Article I(v) shall read:

"(v) To give confidence to members by making the Fund's resources temporarily available tothem under adequate safeguards, thus providing them with opportunity to correct mal-adjustments in their balance of payments without resorting to measures destructive ofnational or international prosperity."

2. The last sentence of Article I shall read:

"The Fund shall be guided in all its policies and decisions by the purposes set forth in thisArticle."

cARTICLE III

QUOTAS AND SUBSCRIPTIONS1. Section 2 shall read:

"Section 2. Adjustment of quotasThe Fund shall at intervals of not more than five years conduct a general review, and if it

deems it appropriate propose an adjustment, of the quotas of the members. It may also, if itthinks fit, consider at any other time the adjustment of any particular quota at the request of the

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A



member concerned. An eighty-five percent majority of the total voting power shall be requiredfor any change in quotas proposed as the result of a general review and a four-fifths majority ofthe total voting power shall be required for any other change in quotas. No quota shall bechanged without the consent of the member concerned."

2. The following subsection (c) shall be added to Section 4. Payments wlien quotas are changed:

"(c) A majority of eighty-five percent of the total voting power shall be required for anydecisions dealing with the payment, or made with the sole purpose of mitigating the effects ofthe payment, of increases in quotas proposed as the result of a general review of quotas."

D

ARTICLE IV

PAR VALUES OF CURRENCIES

1. Section 7 shall read:

"Section 7. Uniform changes in par valuesNotwithstanding the provisions of Section 5(b) of this Article, the Fund by an eighty-five

percent majority of the total voting power may make uniform proportionate changes in the parvalues of the currencies of all members. The par value of a member's currency shall, however,not be changed under this provision if, within seventy-two hours of the Fund's action, themember informs the Fund that it does not wish the par value of its currency to be changed bysuch action."

2. In Section 8. Maintenance of gold value of the Fund's assets, subsection (d) shall read:

"(d) The provisions of this Section shall apply to a uniform proportionate change in the parvalues of the currencies of all members, unless at the time when such a change is made the Funddecides otherwise by an eighty-five percent majority of the total voting power."

ARTICLE V

TRANSACTIONS WITH THE FUND

1. In Section 3. Conditions governing use of the Fund's resources, subsection (a)(iii) shall read:

"(iii) The proposed purchase would be a gold tranche purchase, or would not cause the Fund'sholdings of the purchasing member's currency to increase by more than twenty-fivepercent of its quota during the period of twelve months ending on the date of the purchaseor to exceed two hundred percent of its quota;"

2. The following subsections (c) and (d) shall be added to Section 3:

"(c) A member's use of the resources of the Fund shall be in accordance with the purposes ofthe Fund. The Fund shall adopt policies on the use of its resources that will assist members tosolve their balance of payments problems in a manner consistent with the purposes of the Fundand that will establish adequate safeguards for the temporary use of its resources."

"(d) A representation by a member under (a) above shall be examined by the Fund to deter-mine whether the proposed purchase would be consistent with the provisions of this Agreementand with the policies adopted under them, with the exception that proposed gold tranche purchasesshall not be subject to challenge."

3. In Section 7. Repurchase by a member of its currency held by the Fund, the first sentence of sub-section (b) shall read:

"(b) At the end of each financial year of the Fund, a member shall repurchase from the Fundwith each type of monetary reserve, as determined in accordance with Schedule B, part of theFund's holdings of its currency under the following conditions:

(i) Each member shall use in repurchases of its own currency from the Fund an amount

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E



of its monetary reserves equal in value to the following changes that have occurredduring the year: one-half of any increase in the Fund's holdings of the member'scurrency, plus one-half of any increase, or minus one-half of any decrease, in themember's monetary reserves, or, if the Fund's holdings of the member's currencyhave decreased, one-half of any increase in the member's monetary reserves minusone-half of the decrease in the Fund's holdings of the member's currency."

4. In Section 7, subsection (c) shall read:

"(c) None of the adjustments described in (b) above shall be carried to a point at which(i) the member's monetary reserves are below one hundred fifty percent of its quota, or(ii) the Fund's holdings of its currency are below seventy-five percent of its quota, or

(iii) the Fund's holdings of any currency required to be used are above seventy-five per-cent of the quota of the member concerned, or

(iv) the amount repurchased exceeds twenty-five percent of the quota of the memberconcerned."

5. The following subsection (d) shall be added to Section 7:

"(d) The Fund by an eighty-five percent majority of the total voting power may revise thepercentages in (c)(i) and (iv) above and revise and supplement the rules in paragraph l(c) , (d),and (e) and paragraph 2(b) of Schedule B."

6. In Section 8. Charges, subsection (a) shall read:

"(a) Any member buying the currency of another member from the Fund in exchange for itsown currency shall pay, in addition to the parity price, a service charge uniform for all membersof not less than one-half percent and not more than one percent, as determined by the Fund,provided that the Fund in its discretion may levy a service charge of less than one-half percenton gold tranche purchases."

7. The following Section shall be added to Article V:

"Section 9. Remuneration(a) The Fund shall pay remuneration, at a rate uniform for all members, on the amount by

which seventy-five percent of a member's quota exceeded the average of the Fund's holdings ofthe member's currency, provided that no account shall be taken of holdings in excess of seventy-five percent of quota. The rate shall be one and one-half percent per annum, but the Fund in itsdiscretion may increase or reduce this rate, provided that a three-fourths majority of the totalvoting power shall be required for any increase above two percent per annum or reduction belowone percent per annum.

(b) Remuneration shall be paid in gold or a member's own currency as determined by theFund."

ARTICLE VI

CAPITAL TRANSFERS

1. In Section 1. Use of Fund's resources for capital transfers, subsection (a) shall read:

"(a) A member may not use the Fund's resources to meet a large or sustained outflow of capitalexcept as provided in Section 2 of this Article, and the Fund may request a member to exercisecontrols to prevent such use of the resources of the Fund. If, after receiving such a request, amember fails to exercise appropriate controls, the Fund may declare the member ineligible touse the resources of the Fund."

2. Section 2 shall read:

"Section 2. Special provisions for capital transfersA member shall be entitled to make gold tranche purchases to meet capital transfers."

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G

ARTICLE XII

ORGANIZATION AND MANAGEMENT

1. In Section 2. Board of Governors, subsection (b)(ii) and (iii) shall read:

"(ii) Approve a revision of quotas, or to decide on the payment, or on the mitigation of theeffects of payment, of increases in quotas proposed as the result of a general review ofquotas."

"(iii) Approve a uniform change in the par values of the currencies of all members, or to decidewhen such a change is made that the provisions relating to the maintenance of gold valueof the Fund's assets shall not apply."

2. The following shall be added to Section 2(b):

"(ix) Revise the provisions on repurchase or to revise and supplement the rules for the distribu-tion of repurchases among types of reserves."

"(x) Make transfers to general reserve from any special reserve."

3. The title of Section 6 shall read:

"Reserves and distribution of net income"

4. In Section 6, subsection (b) shall read:

"(b) If any distribution is made of the net income of any year, there shall first be distributedto members eligible to receive remuneration under Article V, Section 9, for that year an amountby which two percent per annum exceeded any remuneration that has been paid for that year.Any distribution of the net income of that year beyond that amount shall be made to all membersin proportion to their quotas. Payments to each member shall be made in its own currency."

5. The following subsection (c) shall be added to Section 6:

"(c) The Fund may make transfers to general reserve from any special reserve."

H

ARTICLE XVIII

INTERPRETATION

Article XVIII(b) shall read:

"(b) In any case where the Executive Directors have given a decision under (a) above, anymember may require, within three months from the date of the decision, that the question bereferred to the Board of Governors, whose decision shall be final. Any question referred to theBoard of Governors shall be considered by a Committee on Interpretation of the Board ofGovernors. Each Committee member shall have one vote. The Board of Governors shall establishthe membership, procedures, and voting majorities of the Committee. A decision of the Committeeshall be the decision of the Board of Governors unless the Board by an eighty-five percent majorityof the total voting power decides otherwise. Pending the result of the reference to the Board theFund may, so far as it deems necessary, act on the basis of the decision of the Executive Directors."

I

ARTICLE XIX

EXPLANATION OF TERMS

1. Article XIX(a) shall read:

"(a) A member's monetary reserves means its official holdings of gold, of convertible currenciesof other members, and of the currencies of such non-members as the Fund may specify."

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2. Article XIX(e) shall read:

"(e) The sums deemed to be official holdings of other official institutions and other banks under(c) above shall be included in the member's monetary reserves."

3. The following shall be added to Article XIX:

"(j) Gold tranche purchase means a purchase by a member of the currency of another memberin exchange for its own currency which does not cause the Fund's holdings of the member'scurrency to exceed one hundred percent of its quota, provided that for the purposes of this defini-tion the Fund may exclude purchases and holdings under policies on the use of its resources forcompensatory financing of export fluctuations."

J

ARTICLE XX

FINAL PROVISIONS

The title of Article XX shall read:

"INAUGURAL PROVISIONS"

K

The following Articles XXI through XXXII shall be added after Article XX:

"ARTICLE XXI

SPECIAL DRAWING RIGHTS

Section 1. Authority to allocate special drawing rights

To meet the need, as and when it arises, for a supplement to existing reserve assets, the Fund isauthorized to allocate special drawing rights to members that are participants in the Special DrawingAccount.

Section 2. Unit of value

The unit of value of special drawing rights shall be equivalent to 0.888 671 gram of fine gold.

ARTICLE XXII

GENERAL ACCOUNT AND SPECIAL DRAWING ACCOUNT

Section 1. Separation of operations and transactions

All operations and transactions involving special drawing rights shall be conducted through theSpecial Drawing Account. All other operations and transactions of the Fund authorized by or underthis Agreement shall be conducted through the General Account. Operations and transactionspursuant to Article XXIII, Section 2, shall be conducted through the General Account as well as theSpecial Drawing Account.

Section 2. Separation of assets and property

All assets and property of the Fund shall be held in the General Account, except that assets andproperty acquired under Article XXVI, Section 2, and Articles XXX and XXXI and Schedules Hand I shall be held in the Special Drawing Account. Any assets or property held in one Accountshall not be available to discharge or meet the liabilities, obligations, or losses of the Fund incurredin the conduct of the operations and transactions of the other Account, except that the expenses ofconducting the business of the Special Drawing Account shall be paid by the Fund from the GeneralAccount which shall be reimbursed from time to time by assessments under Article XXVI, Section 4,made on the basis of a reasonable estimate of such expenses.

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Section 3. Recording and information

All changes in holdings of special drawing rights shall take effect only when recorded by the Fundin the Special Drawing Account. Participants shall notify the Fund of the provisions of this Agree-ment under which special drawing rights are used. The Fund may require participants to furnish itwith such other information as it deems necessary for its functions.

ARTICLE XXIII

PARTICIPANTS AND OTHER HOLDERS OF SPECIAL DRAWING RIGHTS

Section 1. Participants

Each member of the Fund that deposits with the Fund an instrument setting forth that it under-takes all the obligations of a participant in the Special Drawing Account in accordance with its lawand that it has taken all steps necessary to enable it to carry out all of these obligations shall becomea participant in the Special Drawing Account as of the date the instrument is deposited, except thatno member shall become a participant before Articles XXI through XXXII and Schedules F through Ihave entered into force and instruments have been deposited under this Section by members thathave at least seventy-five percent of the total of quotas.

Section 2. General Account as a holder

The Fund may accept and hold special drawing rights in the General Account and use them, inaccordance with the provisions of this Agreement.

Section 3. Other holders

The Fund by an eighty-five percent majority of the total voting power may prescribe:(i) as holders, non-members, members that are non-participants, and institutions that perform

functions of a central bank for more than one member;(ii) the terms and conditions on which these holders may be permitted to accept, hold, and use

special drawing rights, in operations and transactions with participants; and(iii) the terms and conditions on which participants may enter into operations and transactions

with these holders.The terms and conditions prescribed by the Fund for the use of special drawing rights by prescribedholders and by participants in operations and transactions with them shall be consistent with theprovisions of this Agreement.

ARTICLE XXIV

ALLOCATION AND CANCELLATION OF SPECIAL DRAWING RIGHTS

Section 1. Principles and considerations governing allocation and cancellation

(a) In all its decisions with respect to the allocation and cancellation of special drawing rights theFund shall seek to meet the long-term global need, as and when it arises, to supplement existingreserve assets in such manner as will promote the attainment of its purposes and will avoid economicstagnation and deflation as well as excess demand and inflation in the world.

(b) The first decision to allocate special drawing rights shall take into account, as special con-siderations, a collective judgment that there is a global need to supplement reserves, and the attain-ment of a better balance of payments equilibrium, a$ well as the likelihood of a better working ofthe adjustment process in the future.

Section 2. Allocation and cancellation

(a) Decisions of the Fund to allocate or cancel special drawing rights shall be made for basicperiods which shall run consecutively and shall be five years in duration. The first basic period shallbegin on the date of the first decision to allocate special drawing rights or such later date as may bespecified in that decision. Any allocations or cancellations shall take place at yearly intervals.

(b) The rates at which allocations are to be made shall be expressed as percentages of quotas onthe date of each decision to allocate. The rates at which special drawing rights are to be cancelledshall be expressed as percentages of net cumulative allocations of special drawing rights on the dateof each decision to cancel. The percentages shall be the same for all participants.

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(c) In its decision for any basic period the Fund may provide, notwithstanding (a) and (b) above,that:

(i) the duration of the basic period shall be other than five years; or(ii) the allocations or cancellations shall take place at other than yearly intervals; or

(iii) the basis for allocations or cancellations shall be the quotas or net cumulative allocationson dates other than the dates of decisions to allocate or cancel.

(d) A member that becomes a participant after a basic period starts shall receive allocationsbeginning with the next basic period in which allocations are made after it becomes a participantunless the Fund decides that the new participant shall start to receive allocations beginning with thenext allocation after it becomes a participant. If the Fund decides that a member that becomes aparticipant during a basic period shall receive allocations during the remainder of that basic periodand the participant was not a member on the dates established under (b) or (c) above, the Fundshall determine the basis on which these allocations to the participant shall be made.

(e) A participant shall receive allocations of special drawing rights made pursuant to any decisionto allocate unless:

(i) the governor for the participant did not vote in favor of the decision; and(ii) the participant has notified the Fund in writing prior to the first allocation of special draw-

ing rights under that decision that it does not wish special drawing rights to be allocatedto it under the decision. On the request of a participant, the Fund may decide to terminatethe effect of the notice with respect to allocations of special drawing rights subsequent tothe termination.

(f) If on the effective date of any cancellation the amount of special drawing rights held by aparticipant is less than its share of the special drawing rights that are to be cancelled, the participantshall eliminate its negative balance as promptly as its gross reserve position permits and shall remainin consultation with the Fund for this purpose. Special drawing rights acquired by the participantafter the effective date of the cancellation shall be applied against its negative balance and cancelled.

Section 3. Unexpected major developments

The Fund may change the rates or intervals of allocation or cancellation during the rest of a basicperiod or change the length of a basic period or start a new basic period, if at any time the Fundfinds it desirable to do so because of unexpected major developments.

Section 4. Decisions on allocations and cancellations

(a) Decisions under Section 2(a), (b), and (c) or Section 3 of this Article shall be made by theBoard of Governors on the basis of proposals of the Managing Director concurred in by the ExecutiveDirectors.

(b) Before making any proposal, the Managing Director, after having satisfied himself that it willbe consistent with the provisions of Section l(a) of this Article, shall conduct such consultations aswill enable him to ascertain that there is broad support among participants for the proposal. Inaddition, before making a proposal for the first allocation, the Managing Director shall satisfy himselfthat the provisions of Section l(b) of this Article have been met and that there is broad supportamong participants to begin allocations; he shall make a proposal for the first allocation as soon afterthe establishment of the Special Drawing Account as he is so satisfied.

(c) The Managing Director shall make proposals:(i) not later than six months before the end of each basic period;

(ii) if no decision has been taken with respect to allocation or cancellation for a basic period,whenever he is satisfied that the provisions of (b) above have been met;

(iii) when, in accordance with Section 3 of this Article, he considers that it would be desirableto change the rate or intervals of allocation or cancellation or change the length of a basicperiod or start a new basic period; or

(iv) within six months of a request by the Board of Governors or the Executive Directors;provided that, if under (i), (iii), or (iv) above the Managing Director ascertains that there is noproposal which he considers to be consistent with the provisions of Section 1 of this Article thathas broad support among participants in accordance with (b) above, he shall report to the Board ofGovernors and to the Executive Directors.

(d) A majority of eighty-five percent of the total voting power shall be required for decisionsunder Section 2(a), (b), and (c) or Section 3 of this Article except for decisions under Section 3with respect to a decrease in the rates of allocation.

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ARTICLE XXV

OPERATIONS AND TRANSACTIONS IN SPECIAL DRAWING RIGHTS

Section 1. Use of special drawing rights

Special drawing rights may be used in the operations and transactions authorized by or under thisAgreement.

Section 2. Transactions between participants

(a) A participant shall be entitled to use its special drawing rights to obtain an equivalent amountof currency from a participant designated under Section 5 of this Article.

(b) A participant, in agreement with another participant, may use its special drawing rights:(i) to obtain an equivalent amount of its own currency held by the other participant; or

(ii) to obtain an equivalent amount of currency from the other participant in any transactions,prescribed by the Fund, that would promote reconstitution by the other participant underSection 6(a) of this Article; prevent or reduce a negative balance of the other participant;offset the effect of a failure by the other participant to fulfill the expectation in Section 3(a)of this Article; or bring the holdings of special drawing rights by both participants closerto their net cumulative allocations. The Fund by an eighty-five percent majority of thetotal voting power may prescribe additional transactions or categories of transactions underthis provision. Any transactions or categories of transactions prescribed by the Fund underthis subsection (b)(ii) shall be consistent with the other provisions of this Agreement andwith the proper use of special drawing rights in accordance with this Agreement.

(c) A participant that provides currency to a participant using special drawing rights shall receivean equivalent amount of special drawing rights.

Section 3. Requirement of need

(a) In transactions under Section 2 of this Article, except as otherwise provided in (c) below, aparticipant will be expected to use its special drawing rights only to meet balance of payments needsor in the light of developments in its official holdings of gold, foreign exchange, and special drawingrights, and its reserve position in the Fund, and not for the sole purpose of changing the compositionof the foregoing as between special drawing rights and the total of gold, foreign exchange, and reserveposition in the Fund.

(b) The use of special drawing rights shall not be subject to challenge on the basis of the expecta-tion in (a) above, but the Fund may make representations to a participant that fails to fulfill thisexpectation. A participant that persists in failing to fulfill this expectation shall be subject toArticle XXIX, Section 2(b).

(c) Participants may use special drawing rights without fulfilling the expectation in (a) above toobtain an equivalent amount of currency from another participant in any transactions, prescribed bythe Fund, that would promote reconstitution by the other participant under Section 6(a) of thisArticle; prevent or reduce a negative balance of the other participant; offset the effect of a failure bythe other participant to fulfill the expectation in (a) above; or bring the holdings of special drawingrights by both participants closer to their net cumulative allocations.

Section 4. Obligation to provide currency

A participant designated by the Fund under Section 5 of this Article shall provide on demandcurrency convertible in fact to a participant using special drawing rights under Section 2(a) of thisArticle. A participant's obligation to provide currency shall not extend beyond the point at whichits holdings of special drawing rights in excess of its net cumulative allocation are equal to twice itsnet cumulative allocation or such higher limit as may be agreed between a participant and the Fund.A participant may provide currency in excess of the obligatory limit or any agreed higher limit.

Section 5. Designation of participants to provide currency

(a) The Fund shall ensure that a participant will be able to use its special drawing rights bydesignating participants to provide currency for specified amounts of special drawing rights for thepurposes of Sections 2(a) and 4 of this Article. Designations shall be made in accordance with thefollowing general principles supplemented by such other principles as the Fund may adopt from timeto time:

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(i) A participant shall be subject to designation if its balance of payments and gross reserveposition is sufficiently strong, but this will not preclude the possibility that a participantwith a strong reserve position will be designated even though it has a moderate balance ofpayments deficit. Participants shall be designated in such manner as will promote over timea balanced distribution of holdings of special drawing rights among them.

(ii) Participants shall be subject to designation in order to promote reconstitution under Sec-tion 6(a) of this Article; to reduce negative balances in holdings of special drawing rights;or to offset the effect of failures to fulfill the expectation in Section 3 (a) of this Article.

(iii) In designating participants the Fund normally shall give priority to those that need toacquire special drawing rights to meet the objectives of designation under (ii) above.

(b) In order to promote over time a balanced distribution of holdings of special drawing rightsunder (a)(i) above, the Fund shall apply the rules for designation in Schedule F or such rules as maybe adopted under (c) below.

(c) The rules for designation shall be reviewed before the end of the first and each subsequent basicperiod and the Fund may adopt new rules as the result of a review. Unless new rules are adopted,the rules in force at the time of the review shall continue to apply.

Section 6. Reconstitution

(a) Participants that use their special drawing rights shall reconstitute their holdings of them inaccordance with the rules for reconstitution in Schedule G or such rules as may be adopted under(b) below.

(b) The rules for reconstitution shall be reviewed before the end of the first and each subsequentbasic period and new rules shall be adopted if necessary. Unless new rules are adopted or a decisionis made to abrogate rules for reconstitution, the rules in force at the time of the review shall con-tinue to apply. An eighty-five percent majority of the total voting power shall be required fordecisions to adopt, modify, or abrogate the rules for reconstitution.

Section 7. Operations and transactions through the General Account

(a) Special drawing rights shall be included in a member's monetary reserves under Article XIXfor the purposes of Article III, Section 4(a), Article V, Section 7(b) and (c), Article V, Section 8(f),and Schedule B, paragraph 1. The Fund may decide that in calculating monetary reserves and theincrease in monetary reserves during any year for the purpose of Article V, Section 7(b) and (c), noaccount shall be taken of any increase or decrease in those monetary reserves which is due to alloca-tions or cancellations of special drawing rights during the year.

(b) The Fund shall accept special drawing rights:(i) in repurchases accruing in special drawing rights under Article V, Section 7(b); and

(ii) in reimbursement pursuant to Article XXVI, Section 4.(c) The Fund may accept special drawing rights to the extent it may decide:

(i) in payment of charges; and(ii) in repurchases other than those under Article V, Section 7(b), in proportions which, as

far as feasible, shall be the same for all members.(d) The Fund, if it deems such action appropriate to replenish its holdings of a participant's cur-

rency and after consultation with that participant on alternative ways of replenishment under ArticleVII, Section 2, may require that participant to provide its currency for special drawing rights heldin the General Account subject to Section 4 of this Article. In replenishing with special drawingrights, the Fund shall pay due regard to the principles of designation under Section 5 of this Article.

(e) To the extent that a participant may receive special drawing rights in a transaction prescribedby the Fund to promote reconstitution by it under Section 6(a) of this Article, prevent or reduce anegative balance, or offset the effect of a failure by it to fulfill the expectation in Section 3 (a) of thisArticle, the Fund may provide the participant with special drawing rights held in the GeneralAccount for gold or currency acceptable to the Fund.

(f) In any of the other operations and transactions of the Fund with a participant conductedthrough the General Account the Fund may use special drawing rights by agreement with theparticipant.

(g) The Fund may levy reasonable charges uniform for all participants in connection with opera-tions and transactions under this Section.

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Section 8. Exchange rates

(a) The exchange rates for operations or transactions between participants shall be such that aparticipant using special drawing rights shall receive the same value whatever currencies might beprovided and whichever participants provide those currencies, and the fund shall adopt regulations togive effect to this principle.

(b) The Fund shall consult a participant on the procedure for determining rates of exchange forits currency.

(c) For the purpose of this provision the term participant includes a terminating participant.

ARTICLE XXVI

SPECIAL DRAWING ACCOUNT INTEREST AND CHARGES

Section 1. Interest

Interest at the same rate for all holders shall be paid by the Fund to each holder on the amount ofits holdings of special drawing rights. The Fund shall pay the amount due to each holder whetheror not sufficient charges are received to meet the payment of interest.

Section 2. Charges

Charges at the same rate for all participants shall be paid to the Fund by each participant on theamount of its net cumulative allocation of special drawing rights plus any negative balance of theparticipant or unpaid charges.

Section 3. Rate of interest and charges

The rate of interest shall be equal to the rate of charges and shall be one and one-half percentper annum. The Fund in its discretion may increase or reduce this rate, but the rate shall not begreater than two percent or the rate of remuneration decided under Article V, Section 9, whicheveris higher, or smaller than one percent or the rate of remuneration decided under Article V, Section 9,whichever is lower.

Section 4. Assessments

When it is decided under Article XXII, Section 2, that reimbursement shall be made, the Fund shall.levy assessments for this purpose at the same rate for all participants on their net cumulativeallocations.

Section 5. Payment of interest, charges, and assessments

Interest, charges, and assessments shall be paid in special drawing rights. A participant that needsspecial drawing rights to pay any charge or assessment shall be obligated and entitled to obtain them,at its option for gold or currency acceptable to the Fund, in a transaction with the Fund conductedthrough the General Account. If sufficient special drawing rights cannot be obtained in this way, theparticipant shall be obligated and entitled to obtain them with currency convertible in fact from aparticipant which the Fund shall specify. Special drawing rights acquired by a participant after thedate for payment shall be applied against its unpaid charges and cancelled.

ARTICLE XXVII

ADMINISTRATION OF THE GENERAL ACCOUNT AND THE SPECIAL DRAWING ACCOUNT

(a) The General Account and the Special Drawing Account shall be administered in accordancewith the provisions of Article XII, subject to the following:

(i) The Board of Governors may delegate to the Executive Directors authority to exercise anypowers of the Board with respect to special drawing rights except those under ArticleXXIII, Section 3, Article XXIV, Section 2(a), (b), and (c), and Section 3, the penultimatesentence of Article XXV, Section 2(b), Article XXV, Section 6(b), and Article XXXI(a).

(ii) For meetings of or decisions by the Board of Governors on matters pertaining exclusivelyto the Special Drawing Account only requests by or the presence and the votes of governorsappointed by members that are participants shall be counted for the purpose of calling

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meetings and determining whether a quorum exists or whether a decision is made by therequired majority.

(iii) For decisions by the Executive Directors on matters pertaining exclusively to the SpecialDrawing Account only directors appointed or elected by at least one member that is aparticipant shall be entitled to vote. Each of these directors shall be entitled to cast thenumber of votes allotted to the member which is a participant that appointed him or tothe members that are participants whose votes counted towards his election. Only thepresence of directors appointed or elected by members that are participants and the votesallotted to members that are participants shall be counted for the purpose of determiningwhether a quorum exists or whether a decision is made by the required majority.

(iv) Questions of the general administration of the Fund, including reimbursement underArticle XXII, Section 2, and any question whether a matter pertains to both Accounts orexclusively to the Special Drawing Account shall be decided as if they pertained exclusivelyto the General Account. Decisions with respect to the acceptance and holding of specialdrawing rights in the General Account and the use of them, and other decisions affectingthe operations and transactions conducted through both the General Account and theSpecial Drawing Account shall be made by the majorities required for decisions on matterspertaining exclusively to each Account. A decision on a matter pertaining to the SpecialDrawing Account shall so indicate.

(b) In addition to the privileges and immunities that are accorded under Article IX of this Agree-ment, no tax of any kind shall be levied on special drawing rights or on operations or transactions inspecial drawing rights.

(c) A question of interpretation of the provisions of this Agreement on matters pertainingexclusively to the Special Drawing Account shall be submitted to the Executive Directors pursuant toArticle XVIII(a) only on the request of a participant. In any case where the Executive Directorshave given a decision on a question of interpretation pertaining exclusively to the Special DrawingAccount only a participant may require that the question be referred to the Board of Governors underArticle XVIII(b). The Board of Governors shall decide whether a governor appointed by a memberthat is not a participant shall be entitled to vote in the Committee on Interpretation on questionspertaining exclusively to the Special Drawing Account.

(d) Whenever a disagreement arises between the Fund and a participant that has terminated itsparticipation in the Special Drawing Account or between the Fund and any participant during theliquidation of the Special Drawing Account with respect to any matter arising exclusively fromparticipation in the Special Drawing Account, the disagreement shall be submitted to arbitration inaccordance with the procedures in Article XVIII(c).

ARTICLE XXVIII

GENERAL OBLIGATIONS OF PARTICIPANTS

In addition to the obligations assumed with respect to special drawing rights under other Articlesof this Agreement, each participant undertakes to collaborate with the Fund and with other par-ticipants in order to facilitate the effective functioning of the Special Drawing Account and theproper use of special drawing rights in accordance with this Agreement.

ARTICLE XXIX

SUSPENSION OF TRANSACTIONS IN SPECIAL DRAWING RIGHTS

Section 1. Emergency provisions

In the event of an emergency or the development of unforeseen circumstances threatening theoperations of the Fund with respect to the Special Drawing Account, the Executive Directors byunanimous vote may suspend for a period of not more than one hundred twenty days the operationof any of the provisions relating to special drawing rights, and the provisions of Article XVI,Section l(b), (c), and (d), shall then apply.

Section 2. Failure to fulfill obligations

(a) If the Fund finds that a participant has failed to fulfill its obligations under Article XXV,

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Section 4, the right of the participant to use its special drawing rights shall be suspended unless theFund otherwise determines.

(b) If the Fund finds that a participant has failed to fulfill any other obligation with respect tospecial drawing rights, the Fund may suspend the right of the participant to use special drawingrights it acquires after the suspension.

(c) Regulations shall be adopted to ensure that before action is taken against any participantunder (a) or (b) above, the participant shall be informed immediately of the complaint against itand given an adequate opportunity for stating its case, both orally and in writing. Whenever theparticipant is thus informed of a complaint relating to (a) above, it shall not use special drawingrights pending the disposition of the complaint.

(d) Suspension under (a) or (b) above or limitation under (c) above shall not affect a partici-pant's obligation to provide currency in accordance with Article XXV, Section 4.

(e) The Fund may at any time terminate a suspension under (a) or (b) above, provided that asuspension imposed on a participant under (b) above for failure to fulfill the obligation underArticle XXV, Section 6(a), shall not be terminated until one hundred eighty days after the end ofthe first calendar quarter during which the participant complies with the rules for reconstitution.

(f) The right of a participant to use its special drawing rights shall not be suspended becauseit has become ineligible to use the Fund's resources under Article IV, Section 6, Article V, Section 5,Article VI, Section 1, or Article XV, Section 2(a). Article XV, Section 2, shall not apply because aparticipant has failed to fulfill any obligations with respect to special drawing rights.

ARTICLE XXX

TERMINATION OF PARTICIPATION

Section 1. Right to terminate participation

(a) Any participant may terminate its participation in the Special Drawing Account at any time bytransmitting a notice in writing to the Fund at its principal office. Termination shall become effectiveon the date the notice is received.

(b) A participant that withdraws from membership in the Fund shall be deemed to have simul-taneously terminated its participation in the Special Drawing Account.

Section 2. Settlement on termination

(a) When a participant terminates its participation in the Special Drawing Account, all operationsand transactions by the terminating participant in special drawing rights shall cease except as other-wise permitted under an agreement made pursuant to (c) below in order to facilitate a settlementor as provided in Sections 3, 5, and 6 of this Article or in Schedule H. Interest and charges thataccrued to the date of termination and assessments levied before that date but not paid shall be paidin special drawing rights.

(b) The Fund shall be obligated to redeem all special drawing rights held by the terminatingparticipant, and the terminating participant shall be obligated to pay to the Fund an amount equal toits net cumulative allocation and any other amounts that may be due and payable because of itsparticipation in the Special Drawing Account. These obligations shall be set off against each otherand the amount of special drawing rights held by the terminating participant that is used in the setoffto extinguish its obligation to the Fund shall be cancelled.

(c) A settlement shall be made with reasonable dispatch by agreement between the terminatingparticipant and the Fund with respect to any obligation of the terminating participant or the Fundafter the setoff in (b) above. If agreement on a settlement is not reached promptly the provisionsof Schedule H shall apply.

Section 3. Interest and charges

After the date of termination the Fund shall pay interest on any outstanding balance of specialdrawing rights held by a terminating participant and the terminating participant shall pay charges onany outstanding obligation owed to the Fund at the times and rates prescribed under Article XXVI.Payment shall be made in special drawing rights. A terminating participant shall be entitled toobtain special drawing rights with currency convertible in fact to pay charges or assessments in atransaction with a participant specified by the Fund or by agreement from any other holder, or to

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dispose of special drawing rights received as interest in a transaction with any participant designatedunder Article XXV, Section 5, or by agreement with any other holder.

Section 4. Settlement of obligation to the Fund

Gold or currency received by the Fund from a terminating participant shall be used by the Fundto redeem special drawing rights held by participants in proportion to the amount by which eachparticipant's holdings of special drawing rights exceed its net cumulative allocation at the time thegold or currency is received by the Fund. Special drawing rights so redeemed and special drawingrights obtained by a terminating participant under the provisions of this Agreement to meet anyinstallment due under an agreement on settlement or under Schedule H and set off against thatinstallment shall be cancelled.

Section 5. Settlement of obligation to a terminating participant

Whenever the Fund is required to redeem special drawing rights held by a terminating participant,redemption shall be made with currency or gold provided by participants specified by the Fund.These participants shall be specified in accordance with the principles in Article XXV, Section 5.Each specified participant shall provide at its option the currency of the terminating participant orcurrency convertible in fact or gold to the Fund and shall receive an equivalent amount of specialdrawing rights. However, a terminating participant may use its special drawing rights to obtain itsown currency, currency convertible in fact, or gold from any holder, if the Fund so permits.

Section 6. General Account transactions

In order to facilitate settlement with a terminating participant the Fund may decide that a terminat-ing participant shall:

(i) use any special drawing rights held by it after the setoff in Section 2(b) of this Article,when they are to be redeemed, in a transaction with the Fund conducted through theGeneral Account to obtain its own currency or currency convertible in fact at the optionof the Fund; or

(ii) obtain special drawing rights in a transaction with the Fund conducted through theGeneral Account for a currency acceptable to the Fund or gold to meet any charges orinstallment due under an agreement or the provisions of Schedule H.

ARTICLE XXXI

LIQUIDATION OF THE SPECIAL DRAWING ACCOUNT

(a) The Special Drawing Account may not be liquidated except by decision of the Board ofGovernors. In an emergency, if the Executive Directors decide that liquidation of the Special Draw-ing Account may be necessary, they may temporarily suspend allocations or cancellations and alltransactions in special drawing rights pending decision by the Board. A decision by the Board ofGovernors to liquidate the Fund shall be a decision to liquidate both the General Account and theSpecial Drawing Account.

(b) If the Board of Governors decides to liquidate the Special Drawing Account, all allocationsor cancellations and all operations and transactions in special drawing rights and the activities ofthe Fund with respect to the Special Drawing Account shall cease except those incidental to theorderly discharge of the obligations of participants and of the Fund with respect to special drawingrights, and all obligations of the Fund and of participants under this Agreement with respect tospecial drawing rights shall cease except those set out in this Article, Article XVIII(c), Article XXVI,Article XXVII(d), Article XXX and Schedule H, or any agreement reached under Article XXXsubject to paragraph 4 of Schedule H, Article XXXII, and Schedule I.

(c) Upon liquidation of the Special Drawing Account, interest and charges that accrued to thedate of liquidation and assessments levied before that date but not paid shall be paid in specialdrawing rights. The Fund shall be obligated to redeem all special drawing rights held by holders andeach participant shall be obligated to pay the Fund an amount equal to its net cumulative allocationof special drawing rights and such other amounts as may be due and payable because of its participa-tion in the Special Drawing Account.

(d) Liquidation of the Special Drawing Account shall be administered in accordance with theprovisions of Schedule I.

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ARTICLE XXXII

EXPLANATION OF TERMS WITH RESPECT TO SPECIAL DRAWING RIGHTS

In interpreting the provisions of this Agreement with respect to special drawing rights the Fundand its members shall be guided by the following:

(a) Net cumulative allocation of special drawing rights means the total amount of special drawingrights allocated to a participant less its share of special drawing rights that have been cancelled underArticle XXIV, Section 2(a).

(b) Currency convertible in fact means:(1) a participant's currency for which a procedure exists for the conversion of balances of

the currency obtained in transactions involving special drawing rights into each othercurrency for which such procedure exists, at rates of exchange prescribed underArticle XXV, Section 8, and which is the currency of a participant that

(i) has accepted the obligations of Article VIII, Sections 2, 3, and 4, or(ii) for the settlement of international transactions in fact freely buys and sells gold

within the limits prescribed by the Fund under Section 2 of Article IV; or(2) currency convertible into a currency described in paragraph (1) above at rates of exchange

prescribed under Article XXV, Section 8.(c) A participant's reserve position in the Fund means the sum of the gold tranche purchases it

could make and the amount of any indebtedness of the Fund which is readily repayable to theparticipant under a loan agreement."

SCHEDULE B

PROVISIONS WITH RESPECT TO REPURCHASE BY A MEMBER OF ITS CURRENCYHELD BY THE FUND

1. Paragraph 1 shall read:

"1. In determining the extent to which repurchase of a member's currency from the Fundunder Article V, Section 7(b), shall be made with each convertible currency and each of the othertypes of monetary reserve, the following rule, subject to 2 below, shall apply:

(a) If the member's monetary reserves have not increased during the year, the amountpayable to the Fund shall be distributed among all types of reserves in proportionto the member's holdings thereof at the end of the year.

(b) If the member's monetary reserves have increased during the year, a part of the amountpayable to the Fund equal to one-half of the increase, minus one-half of any decreasein the Fund's holdings of the member's currency that has occurred during the year, shallbe distributed among those types of reserves which have increased in proportion to theamount by which each of them has increased. The remainder of the sum payable tothe Fund shall be distributed among all types of reserves in proportion to the member'sremaining holdings thereof.

(c) If after the repurchases required under Article V, Section 7(b), had been made, theresult would exceed either of the limits specified in Article V, Section 7 (c)(i) or (ii),the Fund shall require such repurchases to be made by the member proportionately insuch manner that these limits will not be exceeded.

(d) If after all the repurchases required under Article V, Section 7(b), had been made,the result would exceed the limit specified in Article V, Section 7(c)(iii), the amountby which the limit would be exceeded shall be discharged in convertible currencies asdetermined by the Fund without exceeding that limit.

(e) If a repurchase required under Article V, Section 7(b), would exceed the limit specifiedin Article V, Section 7(c)(iv), the amount by which the limit would be exceeded shallbe repurchased at the end of the subsequent financial year or years in such a way thattotal repurchases under Article V, Section 7(b), in any year would not exceed the limitspecified in Article V, Section 7(c)(iv)."

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2. Paragraph 2 shall read:

"2. (a) The Fund shall not acquire the currency of any non-member under Article V, Sec-tion 7(b) and (c).

(b) Any amount payable in the currency of a non-member under l(a) or l(b) above shallbe paid in the convertible currencies of members as determined by the Fund."

3. The following paragraphs 5 and 6 shall be added to Schedule B:

"5. In calculating monetary reserves and the increase in monetary reserves during any yearfor the purpose of Article V, Section 7(b) and (c), the Fund may decide in its discretion, onthe request of a member, that deductions shall be made for obligations outstanding as the resultof transactions between members under a reciprocal facility by which a member agrees to exchangeon demand its currency for the currency of the other member up to a maximum amount and onterms requiring that each such transaction be reversed within a specified period not in excess ofnine months."

"6. In calculating monetary reserves and the increase in monetary reserves for the purpose ofArticle V, Section 7(b) and (c), Article XIX(e) shall apply except that the following provisionshall apply at the end of a financial year if it was in effect at the beginning of that year:

'A member's monetary reserves shall be calculated by deducting from its central holdings thecurrency liabilities to the Treasuries, central banks, stabilization funds, or similar fiscal agenciesof other members or non-members specified under (d) above, together with similar liabilitiesto other official institutions and other banks in the territories of members, or non-membersspecified under (d) above. To these net holdings shall be added the sums deemed to be officialholdings of other official institutions and other banks under (c) above.'"

M

The following Schedules shall be added after Schedule E:

"SCHEDULE F

DESIGNATION

During the first basic period the rules for designation shall be as follows:

(a) Participants subject to designation under Article XXV, Section 5(a)(i), shall be designatedfor such amounts as will promote over time equality in the ratios of the participants' hold-ings of special drawing rights in excess of their net cumulative allocations to their officialholdings of gold and foreign exchange.

(b) The formula to give effect to (a) above shall be such that participants subject to designationshall be designated:

(i) in proportion to their official holdings of gold and foreign exchange when the ratiosdescribed in (a) above are equal; and

(ii) in such manner as gradually to reduce the difference between the ratios describedin (a) above that are low and the ratios that are high.

SCHEDULE G

RECONSTITUTION

1. During the first basic period the rules for reconstitution shall be as follows:

(a) (i) A participant shall so use and reconstitute its holdings of special drawing rights that,five years after the first allocation and at the end of each calendar quarter thereafter,the average of its total daily holdings of special drawing rights over the most recentfive-year period will be not less than thirty percent of the average of its daily netcumulative allocation of special drawing rights over the same period,

(ii) Two years after the first allocation and at the end of each calendar month thereafterthe Fund shall make calculations for each participant so as to ascertain whetherand to what extent the participant would need to acquire special drawing rights between

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the date of the calculation and the end of any five-year period in order to complywith the requirement in (a)(i) above. The Fund shall adopt regulations with respectto the bases on which these calculations shall be made and with respect to the timingof the designation of participants under Article XXV, Section 5(a)(ii), in order toassist them to comply with the requirement in (a)(i) above.

(iii) The Fund shall give special notice to a participant when the calculations under(a)(ii) above indicate that it is unlikely that the participant will be able to complywith the requirement in (a)(i) above unless it ceases to use special drawing rights forthe rest of the period for which the calculation was made under (a)(ii) above.

(iv) A participant that needs to acquire special drawing rights to fulfill this obligation shallbe obligated and entitled to obtain them, at its option for gold or currency acceptableto the Fund, in a transaction with the Fund conducted through the General Account.If sufficient special drawing rights to fulfill this obligation cannot be obtained in thisway, the participant shall be obligated and entitled to obtain them with currencyconvertible in fact from a participant which the Fund shall specify,

(b) Participants shall also pay due regard to the desirability of pursuing over time a balancedrelationship between their holdings of special drawing rights and their holdings of gold andforeign exchange and their reserve positions in the Fund.

2. If a participant fails to comply with the rules for reconstitution, the Fund shall determinewhether or not the circumstances justify suspension under Article XXIX, Section 2(b).

SCHEDULE H

TERMINATION OF PARTICIPATION

1. If the obligation remaining after the setoff under Article XXX, Section 2(b), is to the terminat-ing participant and agreement on settlement between the Fund and the terminating participant is notreached within six months of the date of termination, the Fund shall redeem this balance of specialdrawing rights in equal half-yearly installments within a maximum of five years of the date oftermination. The Fund shall redeem this balance as it may determine, either (a) by the paymentto the terminating participant of the amounts provided by the remaining participants to the Fund inaccordance with Article XXX, Section 5, or (b) by permitting the terminating participant to use itsspecial drawing rights to obtain its own currency or currency convertible in fact from a participantspecified by the Fund, the General Account, or any other holder.

2. If the obligation remaining after the setoff under Article XXX, Section 2(b), is to the Fundand agreement on settlement is not reached within six months of the date of termination, the terminat-ing participant shall discharge this obligation in equal half-yearly installments within three years ofthe date of termination or within such longer period as may be fixed by the Fund. The terminatingparticipant shall discharge this obligation, as the Fund may determine, either (a) by the paymentto the Fund of currency convertible in fact or gold at the option of the terminating participant, or(b) by obtaining special drawing rights, in accordance with Article XXX, Section 6, from the GeneralAccount or in agreement with a participant specified by the Fund or from any other holder, and thesetoff of these special drawing rights against the installment due.

3. Installments under either 1 or 2 above shall fall due six months after the date of terminationand at intervals of six months thereafter.

4. In the event of the Special Drawing Account going into liquidation under Article XXXI withinsix months of the date a participant terminates its participation, the settlement between the Fundand that government shall be made in accordance with Article XXXI and Schedule I.

SCHEDULE I

ADMINISTRATION OF LIQUIDATION OF THE SPECIAL DRAWING ACCOUNT

1. In the event of liquidation of the Special Drawing Account, participants shall discharge theirobligations to the Fund in ten half-yearly installments, or in such longer period as the Fund maydecide is needed, in currency convertible in fact and the currencies of participants holding specialdrawing rights to be redeemed in any installment to the extent of such redemption, as determined

169



by the Fund. The first half-yearly payment shall be made six months after the decision to liquidatethe Special Drawing Account.

2. If it is decided to liquidate the Fund within six months of the date of the decision to liquidatethe Special Drawing Account, the liquidation of the Special Drawing Account shall not proceeduntil special drawing rights held in the General Account have been distributed in accordance withthe following rule:

After the distribution made under 2(a) of Schedule E, the Fund shall apportion its specialdrawing rights held in the General Account among all members that are participants in propor-tion to the amounts due to each participant after the distribution under 2(a). To determine theamount due to each member for the purpose of apportioning the remainder of its holdings ofeach currency under 2(c) of Schedule E, the Fund shall deduct the distribution of special draw-ing rights made under this rule.

3. With the amounts received under 1 above, the Fund shall redeem special drawing rights heldby holders in the following manner and order:

(a) Special drawing rights held by governments that have terminated their participation morethan six months before the date the Board of Governors decides to liquidate the SpecialDrawing Account shall be redeemed in accordance with the terms of any agreement underArticle XXX or Schedule H.

(b) Special drawing rights held by holders that are not participants shall be redeemed beforethose held by participants, and shall be redeemed in proportion to the amount held byeach holder.

(c) The Fund shall determine the proportion of special drawing rights held by each participantin relation to its net cumulative allocation. The Fund shall first redeem special drawingrights from the participants with the highest proportion until this proportion is reduced tothat of the second highest proportion; the Fund shall then redeem the special drawing rightsheld by these participants in accordance with their net cumulative allocations until theproportions are reduced to that of the third highest proportion; and this process shall becontinued until the amount available for redemption is exhausted.

4. Any amount that a participant will be entitled to receive in redemption under 3 above shall beset off against any amount to be paid under 1 above.

5. During liquidation the Fund shall pay interest on the amount of special drawing rights held byholders, and each participant shall pay charges on the net cumulative allocation of special drawingrights to it less the amount of any payments made in accordance with 1 above. The rates of interestand charges and the time of payment shall be determined by the Fund. Payments of interest andcharges shall be made in special drawing rights to the extent possible. A participant that does nothold sufficient special drawing rights to meet any charges shall make the payment with gold or acurrency specified by the Fund. Special drawing rights received as charges in amounts needed foradministrative expenses shall not be used for the payment of interest, but shall be transferred to theFund and shall be redeemed first and with the currencies used by the Fund to meet its expenses.

6. While a participant is in default with respect to any payment required by 1 or 5 above, noamounts shall be paid to it in accordance with 2 or 5 above.

7. If after the final payments have been made to participants each participant not in default doesnot hold special drawing rights in the same proportion to its net cumulative allocation, those partici-pants holding a lower proportion shall purchase from those holding a higher proportion such amountsin accordance with arrangements made by the Fund as will make the proportion of their holdingsof special drawing rights the same. Each participant in default shall pay to the Fund its own currencyin an amount equal to its default. The Fund shall apportion this currency and any residual claimsamong participants in proportion to the amount of special drawing rights held by each and thesespecial drawing rights shall be cancelled. The Fund shall then close the books of the Special DrawingAccount and all of the Fund's liabilities arising from the allocations of special drawing rights and theadministration of the Special Drawing Account shall cease.

8. Each participant whose currency is distributed to other participants under this Schedule guaran-tees the unrestricted use of such currency at all times for the purchase of goods or for payments ofsums due to it or to persons in its territories. Each participant so obligated agrees to compensate otherparticipants for any loss resulting from the difference between the value at which the Fund distributedits currency under this Schedule and the value realized by such participants on disposal of itscurrency."

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ANNEX B

Outline of a Facility Based on Special Drawing Rights in the Fund

Introduction

The facility described in this Outline is intended to meet the need, as and when it arises, for asupplement to existing reserve assets. It is to be established within the framework of the Fund and,therefore, by an Amendment of the Fund's Articles. Provisions relating to some of the topics in thisOutline could be included in By-Laws adopted by the Board of Governors or Rules and Regulationsadopted by the Executive Directors rather than in the Amendment.

I. Establishment of a Special Drawing Account in the Fund

(a) An Amendment to the Articles will establish a Special Drawing Account through which allthe operations relating to special drawing rights will be carried out. The purposes of the facility willbe set forth in the introductory section of the Amendment.

(b) The operations of and resources available under the Special Drawing Account will be separatefrom the operations of the present Fund which will be referred to as the General Account.

(c) Separate provisions will be included in the Amendment for withdrawal from or liquidation ofthe Special Drawing Account; Article XVI, Section 2 and Schedules D and E on withdrawal andliquidation will continue to apply as they do at present to the General Account of the Fund.

II. Participants and Other Holders

1. Participants. Participation in the Special Drawing Account will be open to any member ofthe Fund that undertakes the obligations of the Amendment. A member's quota in the Fund willbe the same for the purposes of both the General and the Special Drawing Accounts of the Fund.

2. Holding by General Account. The General Account will be authorized to hold and use specialdrawing rights.

III. Allocation of Special Drawing Rights

1. Principles for decisions. The Special Drawing Account will allocate special drawing rights inaccordance with the provisions of the Amendment. Special considerations applicable to the firstdecision to allocate special drawing rights, as well as the principles on which all decisions to allocatespecial drawing rights will be based, will be included in the introductory section of the Amendmentand, to the extent necessary, in a Report explaining the Amendment.

2. Basic period and rate of allocation. The following provisions will apply to any decision toallocate special drawing rights:

(i) The decision will prescribe a basic period during which special drawing rights will be allocatedat specified intervals. The period will normally be five years in length, but the Fund may decidethat any basic period will be of different duration. The first basic period will begin on the effectivedate of the first decision to allocate special drawing rights.

(ii) The decision will also prescribe the rate or rates at which special drawing rights will beallocated during the basic period. Rates will be expressed as a percentage, uniform for all partici-pants, of quotas on the date specified in the decision.

3. Procedure for decisions.(a) Any decision on the basic period for, timing of, or rate of allocation of special drawing rights

will be taken by the Board of Governors on the basis of a proposal by the Managing Directorconcurred in by the Executive Directors.

(b) Before formulating any proposal, the Managing Director after having satisfied himself thatthe considerations referred to in III.l have been met, will conduct such consultations as will enablehim to ascertain that there is broad support among participants for the allocation of special drawingrights at the proposed rate and for the proposed basic period.

(c) The Managing Director will make proposals with respect to the allocation of special drawingrights: (i) within sufficient time before the end of a basic period; (ii) in the circumstances of III.4;(iii) within six months after the Board of Governors or the Executive Directors request that he makea proposal. The Managing Director will make a proposal for the first basic period when he is ofthe opinion that there is broad support among the participants to start the allocation of specialdrawing rights.

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(d) The Executive Directors will review both the operations of the Special Drawing Account andthe adequacy of global reserves as part of their annual report to the Board of Governors.

4. Change in rate of allocation or basic period. If there are unexpected major developments whichmake it desirable to change the rate at which further special drawing rights are to be allocated for abasic period, (i) the rate may be increased or decreased, or (ii) the basic period may be terminatedand a different rate of allocation adopted for a new basic period. Paragraph III.3 will apply to suchchanges.

5. Voting majority.(a) For decisions on the basic period for, timing of, amount and rate of allocation of special

drawing rights, an 85 per cent majority of the voting power of participants shall be required.(b) Notwithstanding (a) above, the decisions to decrease the rate of allocation of special drawing

rights for the remainder of the basic period will be taken by a simple majority of the voting power ofparticipants.

6. Opting out. The Amendment will include provisions that will prescribe to what extent aparticipant will be required initially to receive special drawing rights, but will stipulate that beyondany such amount a participant that does not vote in favor of a decision to allocate special drawingrights may elect not to receive them under that decision.

IV. Cancellation of Special Drawing Rights

The principles set forth in III relating to the procedure and voting for the allocation of specialdrawing rights will be applicable, with appropriate modifications, to the cancellation of such rights.

V. Use of Special Drawing Rights

1. Right to use special drawing rights.(a) A participant will be entitled, in accordance with the provisions of V, to use special drawing

rights to acquire an equivalent amount of a currency convertible in fact. A participant which thusprovides currency will receive an equivalent amount of special drawing rights.

(b) Within the framework of such rules and regulations as the Fund may adopt, a participantmay obtain the currencies referred to in (a) either directly from another participant or through theSpecial Drawing Account.

(c) Except as indicated in V.3(c), a participant will be expected to use its special drawing rightsonly for balance of payments needs or in the light of developments in its total reserves and not forthe sole purpose of changing the composition of its reserves.

(d) The use of special drawing rights will not be subject to prior challenge on the basis of thisexpectation, but the Fund may make representations to any participant which, in the Fund's judgment,has failed to observe the expectation, and may direct drawings to such participant to the extent ofsuch failure.

2. Provision of currency. A participant's obligation to provide currency will not extend beyond apoint at which its holdings of special drawing rights in excess of the net cumulative amount of suchrights allocated to it are equal to twice that amount. However, a participant may provide currency,or agree with the Fund to provide currency, in excess of this limit.

3. Selection of participants to be drawn upon. The Fund's rules and instructions relating to theparticipants from which currencies should be acquired by users of special drawing rights will bebased on the following main general principles, supplemented by such principles as the Fund mayfind desirable from time to time:

(a) Normally, currencies will be acquired from participants that have a sufficiently strong balanceof payments and reserve position, but this will not preclude the possibility that currency will beacquired from participants with strong reserve positions even though they have moderate balance ofpayments deficits.

(b) The Fund's primary criterion will be to seek to approach over time equality, among theparticipants indicated from time to time by the criteria in (a) above, in the ratios of their holdings ofspecial drawing rights, or such holdings in excess of net cumulative allocations thereof, to totalreserves.

(c) In addition, the Fund will, in its rules and instructions, provide for such use of special drawingrights, either directly between participants or through the intermediary of the Special DrawingAccount, as will promote voluntary reconstitution and reconstitution under V.4.

(d) Subject to the provisions of V.l(c), a participant may use its special drawing rights topurchase balances of its currency held by another participant, with the agreement of the latter.

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4. Reconstitution.(a) Members that use their special drawing rights will incur an obligation to reconstitute their

position in accordance with principles which will take account of the amount and the duration ofthe use. These principles will be laid down in rules and regulations of the Fund.

(b) The rules for reconstitution of drawings made during the first basic period will be based on thefollowing principles:

(i) The average net use, taking into account both use below and holdings above its netcumulative allocation, made by a participant of its special drawing rights calculated onthe basis of the preceding five years, shall not exceed 70 per cent of its average net cumula-tive allocation during this period. Reconstitution under this subparagraph (i) will bebrought about through the mechanism of transfers, by the Fund directing drawingscorrespondingly.

(ii) Participants will pay due regard to the desirability of pursuing over time a balanced rela-tionship between their holdings of special drawing rights and other reserves.

(c) Reconstitution rules will be reviewed before the end of the first and of each subsequent periodand new rules will be adopted, if necessary. If new rules are not adopted for a basic period, therules for the preceding period shall apply unless it is decided to abrogate reconstitution rules. Thesame majority as is required for decisions on the basic period, timing of, or rate of allocation ofspecial drawing rights will be required for decisions to adopt, amend, or abrogate reconstitution rules.Any amendment in the rules will govern the reconstitution of drawings made after the effective dateof the amendment, unless otherwise decided.

VI. Interest and Maintenance of Gold Value

(a) Interest. A moderate rate of interest will be paid in special drawing rights on holdings ofspecial drawing rights. The cost of this interest will be assessed against all participants in propor-tion to net cumulative allocations of special drawing rights to them.

(b) Maintenance of gold value. The unit of value for expressing special drawing rights will beequal to 0.888 671 grams of fine gold. The rights and obligations of participants and of the SpecialDrawing Account will be subject to an absolute maintenance of gold value or to provisions similarto Article IV, Section 8 of the Fund's Articles.

VII. Functions of Fund Organs and Voting

1. Exercise of powers. The decisions taken with respect to the Special Drawing Account, andthe supervision of its operations, will be carried out by the Board of Governors, the Executive Direc-tors, the Managing Director, and the staff of the Fund. Certain powers, and in particular thoserelating to the adoption of decisions concerning the allocation, cancellation, and certain aspects ofthe use of special drawing rights, will be reserved to the Board of Governors. All other powers,except those specifically granted to other organs, will be vested in the Board of Governors which willbe able to delegate them to the Executive Directors.

2. Voting. Except as otherwise provided in the Amendment, all decisions pertaining to the SpecialDrawing Account will be taken by a majority of votes cast. The precise formula for the voting powerof participants, which will include basic and weighted votes, and possibly the adjustment of votingpower in relation to the use of special drawing rights, will be the subject of later consideration.

VIII. General Provisions

1. Collaboration. Participants will undertake to collaborate with the Fund in order to facilitatethe proper functioning and effective use of special drawing rights within the international monetarysystem.

2. Nonfulfillment of obligations.(a) If the Fund finds that a participant has failed to fulfill its obligations to provide currency in

accordance with the Amendment, the Fund may suspend the right of the participant to use itsspecial drawing rights.

(b) If the Fund finds that a participant has failed to fulfill any other obligation under the Amend-ment, the Fund may suspend the participant's right to use any special drawing rights allocated to, oracquired by, it after the suspension.

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Appendix I (concluded). EXECUTIVE BOARD DECISIONS AND REPORT

(c) Suspension under (a) or (b) above will not affect a participant's obligation to providecurrency in accordance with the Amendment.

(d) The Fund may at any time terminate a suspension under (a) or (b) above.3. Accounts. All changes in holdings of special drawing rights will take effect when recorded in

the accounts of the Special Drawing Account.

IX. Entry into Force

The Amendment would enter into force in accordance with the terms of Article XVII of the Fund'sArticles.

174


Appendix II. EXECUTIVE DIRECTORS AND VOTING POWERon April 30, 1968

DirectorA Iternate

APPOINTED

William B. DaleJohn S. Hooker

E. W. MaudeGuy Huntrods

Ernst vom HofeHorst Ungerer

Georges PlescoffPaul Mentre

B. K. MadanA run K. Banerji

CastingVotes of

United States

United Kingdom

Germany

France

India

Votes byCountry

51,850

24,650

12,250

10,100

7,750

TotalVotes i

51,850

24,650

12,250

10,100

7,750

Per Centof Total

22.03

10.48

5.21

4.29

3.29

ELECTED

Ahmed Zaki Saad(United Arab Republic)

Albert Mansour(United Arab Republic}

Francesco Palamenghi-Crispi (Italy)Costa P. Caranicas (Greece]

Hideo Suzuki (Japan)Seitaro Hattori (Japan}

S. J. Handfield-Jones (Canada)Patrick M. Reid (Canada}

J. O. Stone (Australia)A.M.de Villiers (South Africa}

AfghanistanEthiopiaIranIraqJordanKuwaitLebanonPakistanPhilippinesSaudi ArabiaSomalia\Syrianv Arab RepublicUnited Arab Republic

GreeceItalyPortugalSpain

BurmaCeylonJapanNepalThailand

CanadaGuyanaIrelandJamaica

AustraliavNew ZealandScSfSftthiAfrica

540440

1,5001,050

410750340

2,1301,3501,150

400630

1,750

1,2506,5001,0002,750

5501,0307,500

3501,200

7,650400

1,050550

5,2501,820

- 2,250

12,440

11,500

10,630

9,650

9,320

5.29

4.89

4.52

4.10

3.96

175


Appendix II (continued). EXECUTIVE DIRECTORS AND VOTING POWERon April 30, 1968

DirectorA Iternate

Pieter Lieftinck (Netherlands)H.M.H.A.vanderValkk

(Netherlands))

Andre van Campenhout (Belgium)Herman Biron (Belgium}

Jorge Gonzalez del Valle (Guatemala)Alfredo Phillips O. (Mexico)

Tor ben Friis (Denmark)Jorma Aranko (Finland}

Alexandre Kafka (Brazil)Eduardo da S. Gomes, Jr.

(Brazil)

Paul L. Faber (Guinea)Leonard A. Williams (Trinidad

and Tobago)

CastingVotes of

CyprusIsraelNetherlandsYugoslavia

AustriaBelgiumLuxembourgTurkey

Costa RicaEl SalvadorGuatemalaHondurasMexicoNicaraguaVenezuela

DenmarkFinlandIcelandNorwaySweden

BrazilColombiaDominican RepublicHaitiPanamaPeru

BurundiGuineaKenyaLiberiaMalawiMaliNigeriaSierra LeoneSudanTanzaniaTrinidad and TobagoUgandaZambia

Votes byCountry

4001,1505,4501,750

2,0004,470

4161,330

500500500440

2,950440

2,750

1,8801,500

4001,7502,500

3,7501,500

542400362

1,100

400440570450362420

1,250400820570500570750

Total Per CentVotes i of Total

8,750 3.72

8,216 3.49

8,080 3.43

8,030 3.41

7,654 3.25

7,502 3.19

176


Appendix II (concluded). EXECUTIVE DIRECTORS AND VOTING POWERon April 30, 1968

DirectorA Iternate

CastingVotes of

Votes byCountry

TotalVotes i

Per Centof Total

Adolfo C. Diz (Argentina)Yamandu S. Patron (Uruguay)

Argentina 3,750Bolivia 540Chile 1,500Ecuador 500Paraguay 400Uruguay 800 7,490 3.188

Beue Tann (China)C. L. Chow (China}

China 5,750Korea 750Viet-Nam 640 7,140 3.033

Amon Nikoi (Ghana)Vacant

Algeria 940Ghana 940Laos 325Libya 440Malaysia 1,400Morocco 1,078Singapore 550Tunisia 600 6,273 2.677

Antoine W. Yameogo (Upper Volta)Leon M. Rajaobelina

(Malagasy Republic)

Cameroon 416Central African Republic 335Chad 335Congo (Brazzaville) 335Congo, Democratic Rep. of 820Dahomey 335Gabon 335Ivory Coast 424Malagasy Republic 440Mauritania 340Niger 335Rwanda 400Senegal 500Togo 362Upper Volta 335 6,047 2.57

235,322' 100.001 Voting power varies on certain matters with use by members of the Fund's resources.2 This total does not include the votes of Indonesia, which rejoined the Fund after the 1966 Regular

Election of Executive Directors, or of The Gambia, which joined the Fund after that Election.

177


Appendix III. CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

Changes in the membership of the Executive Board between May 1, 1967 andApril 30, 1968 were as follows:

Gerard Teyssier (France) resigned as Alternate Executive Director to Rene Larre(France), effective July 30, 1967.

Paul Mentre (France) was appointed Alternate Executive Director to Rene Larre(France), effective July 31, 1967, and to Georges Plescoff (France), effective Septem-ber 1, 1967.

Sir John Stevens (United Kingdom) resigned as Executive Director for the UnitedKingdom, effective August 8, 1967.

E. W. Maude (United Kingdom) was appointed Executive Director by the UnitedKingdom, effective August 9, 1967.

Douglas W. G. Wass (United Kingdom), formerly Alternate Executive Director toSir John Stevens (United Kingdom), was appointed Alternate Executive Director toE. W. Maude (United Kingdom), August 9, 1967. He resigned, effective October 27,1967.

Rene Larre (France) resigned as Executive Director for France, effective August 31,1967.

Georges Plescoff (France) was appointed Executive Director by France, effectiveSeptember 1, 1967.

Guy Huntrods (United Kingdom) was appointed Alternate Executive Director toE. W. Maude (United Kingdom), effective October 28, 1967.

Sergio Siglienti (Italy) resigned as Executive Director for Greece, Italy, Portugal, andSpain, effective November 30, 1967.

Francesco Palamenghi-Crispi (Italy) was elected Executive Director by Greece, Italy,Portugal, and Spain, effective December 1, 1967.

Costa P. Caranicas (Greece), formerly Alternate Executive Director to Sergio Siglienti(Italy), was appointed Alternate Executive Director to Francesco Palamenghi-Crispi(Italy), effective December 1, 1967.

Muhamad Barmawie Alwie (Indonesia) resigned as Alternate Executive Director toAmon Nikoi (Ghana), effective February 16, 1968.

Paulo H. Pereira Lira (Brazil) resigned as Alternate Executive Director to AlexandreKafka (Brazil), effective March 4, 1968.

Eduardo da S. Gomes, Jr. (Brazil), was appointed Alternate Executive Director toAlexandre Kafka (Brazil), effective March 29, 1968.

Eiji Ozaki (Japan) resigned as Alternate Executive Director to Hideo Suzuki (Japan),effective April 26, 1968.

Seitaro Hattori (Japan) was appointed < Aft toatet Executive Director to Hideo Suzuki(Japan), effective April 27, 196&

Ernst vom Hofe (Germany) resigned as Executive Director for Germany, effectiveApril 30, 1968.

178


Appendix III (continued). CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

Guenther Schleiminger (Germany) was appointed Executive Director by Germany,effective May 1, 1968.

Horst Ungerer (Germany), formerly Alternate Executive Director to Ernst vom Hofe(Germany), was appointed Alternate Executive Director to Guenther Schleiminger(Germany), effective May 1, 1968.

The following served at certain times as Temporary Alternate Executive Directors tothe Executive Directors indicated during 1967/68:

Temporary AlternateExecutive Director

Javier Aljovin Swayne (Peru)

Ricardo Hector Arriazu (Argentina)

T. J. Bartley (Australia)

J. M. Chona (India)

Jose Juan de Olloqui (Mexico)

P. D. Fells (Australia)

Daniel Fernandez (Argentina)

Dieter Frommel (Germany)

Felice Gianani (Italy)

Carlos Gibson (Peru)

G. Malcolm Gill (United Kingdom)

J. Grooters (Netherlands)

R. Guarnieri (Venezuela)

S. Guhan (India)

Joaquin Gutierrez Cano (Spain)

Gabriel Oyaletor Ijewere (Nigeria)

Mohamed Nassim Kochman (Mauritania)

Craig T. MacDonald (Canada)

Jean Malaplate (France)

Guillermo Marquez (Venezuela)

Paul Mentre (France)

Erwin Schmidbauer (Austria)

Executive Director for whomTemporary Alternate Served

Alexandre Kafka (Brazil)

Adolfo C. Diz (Argentina)

J. O. Stone (Australia)

B. K. Madan (India)

Jorge Gonzalez del Valle (Guatemala)

J. O. Stone (Australia)

Adolfo C. Diz (Argentina)

Ernst vom Hofe (Germany)

Sergio Siglienti (Italy)

Alexandre Kafka (Brazil)

E. W. Maude (United Kingdom)

Sir John Stevens (United Kingdom)

Pieter Lieftinck (Netherlands)


B. K. Madan (India)

Sergio Siglienti (Italy)

Paul L. Faber (Guinea)

Antoine W. Yameogo (Upper Volta)

S. J. Handfield-Jones (Canada)

Rene Larre (France)


Rene Larre (France)

Andre van Campenhout (Belgium)

179


Appendix III (concluded). CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

Temporary AlternateExecutive Director

H. G. Schneider (Austria)

Iddi Simba (Tanzania)

Taoufic Smida (Tunisia)

Erich Staffers (Germany)

Willy Stoop (Belgium)

Tetsuo Tanaka (Japan)

Jean R. Vallet (France)

Executive Director for whomTemporary Alternate Served


Paul L. Faber (Guinea)

Amon Nikoi (Ghana)

Ernst vom Hofe (Germany)


Hideo Suzuki (Japan)

Rene Larre (France)

Georges Plescoff (France)

180


Appendix IV. ADMINISTRATIVE BUDGET

Letter of Transmittal

July 19, 1968


The administrative budget of the Fund approved by the Executive Board for theFiscal Year ending April 30, 1969 is presented herewith, in accordance with Section 20of the By-Laws. The presentation also shows actual expenditure for the past two fiscalyears.

I should like to point out that it is of course impossible to predict whether the amountsbudgeted will, in fact, meet the requirements of the Fund's program. The amounts shownare estimates of requirements on the basis of the expected level of activities Shouldcontingencies arise or present plans change materially, the management would recom-mend appropriate amendments to the Executive Board.

Yours sincerely,A/

P.-P. SCHWEITZERChairman of the Executive Board

Chairman of the Board of GovernorsInternational Monetary Fund

181


Appendix IV (concluded)

ADMINISTRATIVE BUDGET AS APPROVED BY THE EXECUTIVE BOARD FOR THE FISCAL YEAR ENDINGAPRIL 30, 1969, COMPARED WITH ACTUAL EXPENDITURES FOR THE FISCAL YEARS

1966-67 AND 1967-68

Category of Expenditure

I BOARD OF GOVERNORS

II. EXECUTIVE DIRECTORSSalaries and allowancesOther compensations and benefitsTravel

Total

III. STAFFSalariesOther compensations and benefitsTravel

Total . . . .

IV. SPECIAL SERVICES TO MEMBER COUNTRIES

V. OTHER ADMINISTRATIVE EXPENSESCommunicationsOffice occupancy expensesBooks and printingSupplies and equipmentMiscellaneous

Total

TOTAL

F.Y. 1968-69Budget

$ 617,000

1,390,000351,000437,000

$ 2,178,000

9,970,0003,546,0002,440,000

$15,956,000

$ 2,199,000

572,000630,000526,000610,000712,000

$ 3,050,000

$24,000,000

F.Y. 1967-68

Budget

$ 850,000

1,340,000339,000386,000

$ 2,065,000

8,980,0003,153,0002,410,000

$14,543,000

$ 1,948,000

627,000500,000479,000517,000571,000

$ 2,694,000

$22,100,000

ActualExpenditures

$ 835,961

1,324,075294,829333,076

$ 1,951,980

8,955,0353,080,7312,226,981

$14,262,747

$ 1,774,917

626,683478,960351,673494,556521,962

$ 2,473,834

$21,299,439

F.Y. 1966-67Actual

Expenditures

$ 509,243

1,242,497256,608336,182

$ 1,835,287

7,651,3282,551,2262,034,929

$12,237,483

$ 1,242,350

445,079559,479394,088445,488413,838

$ 2,257,972

$18,082,335

182


Appendix V. COMPARATIVE STATEMENT OF INCOME AND EXPENDITURE

INCOME *Service charges

Received in goldReceived in members' currencies

Total

Charges on Fund's holdings of members' curren-cies and securities in excess of quotas

Received in goldReceived in members' currencies

Total

Other operational incomeMiscellaneous income

TOTAL INCOME

EXPENDITUREAdministrativeOperationalFixed property

TOTAL EXPENDITURE

Year EndedApr. 30, 1966

$ 2,129,79111,956,646

$14,086,437

$25,539,96340,201,724

$65,741,687

$ 1,484,5723,904

$81,316,600

$15,035,58716,074,3735,661,158

$36,771,118


$ 2,488,1252,818,250

$ 5,306,375

$19,599,21462,925,472

$82,524,686

$ 1,780,3947,101

$89,618,556

$18,082,33517,804,3273,305,352

$39,192,014


$ 4,843,9631,897,287

$ 6,741,250

$21,110,65260,918,029

$82,028,681

$ 663,3539,472

$89,442,756

$21,299,43911,945,077

454,515

$33,699,031

1 Excludes income from investments transferred to Special Reserve for the fiscal years endednril 10 as fnllnws-April 30, as follows:

196619671968.

. . $33,907,38340,959,870

. . 39,750,857

183


Appendix VI. FINANCIAL STATEMENTS OF INTERNATIONALMONETARY FUND AND STAFF RETIREMENT FUND

Letter of Transmittal

July 19, 1968


In accordance with Section 20(b) of the By-Laws of the Fund, I have the honor tosubmit for the consideration of the Board of Governors the audited financial statementsof the International Monetary Fund, and the Staff Retirement Fund, for the year endedApril 30, 1968, together with two memoranda from the Audit Committee, which includethe audit certificates.

In conformity with the By-Laws, the external audit of the Fund has been performedby an Audit Committee consisting of auditors nominated by three member countries. Atthe Fund's request, Canada, Ethiopia and Spain nominated auditors to serve on thisCommittee. They respectively nominated Mr. George R. Long, Assistant Auditor Generalof Canada; Mr. Teferra Liben, Chief Auditor, Inland Revenue Department of Ethiopia,and Mr. Francisco Estevez Jimenez, Accounting and Auditing Service of the Ministry ofFinance, Spain. The Auditors thus nominated were confirmed by the Executive Directors.

It will be noted that, in the period under review, ordinary income amounted to$89,442,756 and expenditure amounted to $33,699,031, resulting in a net income of$55,743,725, which has been transferred provisionally to General Reserve pendingBoard of Governors' action. In addition, income of $39,750,857 from the Fund's Invest-ment program has been transferred to the Special Reserve.

The detailed report of the Audit Committee is being submitted separately to the Boardof Governors.

Yours sincerely,/s/

P.-P. SCHWEITZERChairman of the Executive Board

Chairman of the Board of GovernorsInternational Monetary Fund

184


Appendix VI (continued)

MEMORANDUM BY THE AUDIT COMMITTEE

June 21, 1968

To the Managing Directorand the Executive Directors


The report of the Audit Committee, dated June 21, 1968, submitted through youto the Board of Governors, on the audit of the financial records and transactions ofthe Fund for the fiscal year ended April 30, 1968, includes the following paragraphsrelating to the scope of the audit and the audit certificate given:

SCOPE OF THE AUDIT

The audit was conducted in accordance with the requirements of Section 20(b)of the By-Laws that the audit be comprehensive with respect to the examination ofthe financial records of the Fund; that it extend, insofar as practicable, to the ascertain-ment that financial transactions consummated during the period under review weresupported by the necessary authority; and that it determine that there was adequateand faithful accounting for the assets of the Fund. In considering the authority forfinancial transactions, reference was made to the Articles of Agreement, the By-Lawsand Rules and Regulations of the Fund, the resolutions of the Board of Governors,the minutes of the Executive Board and the General Administrative Orders of theFund. The Committee applied such tests to the accounting and other financial recordsas it considered necessary to establish the adequacy of the system of accounting andinternal control. In determining the Committee's program of test examination, con-sideration was given to the work carried out by the Internal Auditor, as reported by him,and to the standard of his work as observed by the Committee.

AUDIT CERTIFICATE

We have examined the Balance Sheet of the International Monetary Fund as atApril 30, 1968, the Statement of Income and Expenditure and the Statement ofReserves for the year then ended, and the schedules related to these statements. Ourexamination was made in accordance with generally accepted auditing standards, andaccordingly included such tests of the accounting records and such other auditingprocedures as we considered necessary in the circumstances.

In our opinion, the Balance Sheet and Statement of Income and Expenditure,together with the notes appearing thereon, present fairly the financial position of theInternational Monetary Fund as at April 30, 1968, and the results of its operationsfor the year then ended, in conformity with generally accepted accounting principlesapplied on a basis consistent with that of the preceding year.

AUDIT COMMITTEE:

/s/ G. R. Long, Chairman (Canada)

/s/ Teferra Liben (Ethiopia)

/s/ F. Estevez (Spain)

185


Appendix VIExhibit A

BALANCEas at April

Values expressed in U.S. dollars on the

ASSETS

GOLD ACCOUNTGold with depositories (See Note 1)

(86,182,177.767 fine ounces at $35 per ounce)Bars $2,727,238,948General deposits 289,137,274

$3,016,376,222

Less: 5,718.657 fine ounces heldin suspense for the account ofBotswana and Lesotho pendingcompletion of the formalities ofmembership 200,153 $ 3,016,176,069

Investments (See Note 2)U.S. Government securities ma-

turing within 12 months, atcost (face amount $831,740,000). $799,886,302

Funds awaiting investment 105,209 799,991,511 $ 3,816,167,580

CURRENCIES AND SECURITIES (See Note 3)With depositories

Currencies $ 3,283,373,511Securities 14,512,445,314 17,795,818,825

(nonnegotiable, noninterest-bearing demand obligations,payable at face value bymembers in their currencies)

SUBSCRIPTIONS TO CAPITAL—RECEIVABLEBalances of original quotas—not due $741,152,827Balances of increases in quotas:

Due $27,750,000Not due (Contra) 51,200,000 78,950,000 820,102,827

WITHDRAWING MEMBER'S CURRENCY (See Note 4) 2,499,965

OTHER ASSETS (See Note 5) 39,517,952

TOTAL ASSETS $22,474,107,149

NOTES:1. Excludes 11,994.698 fine ounces earmarked for members.

2. Made with the proceeds of the sale of 22,856,900.312 fine ounces of gold. Upon termination of the investment, thesame quantity of gold can be reacquired.

3. Total outstanding drawings of members amount to $4,560 million. Currency holdings in excess of members' quotassubject to Fund charges amount to $2,442 million.

4. Redeemable by Cuba in gold, or convertible currencies acceptable to the Fund, not later than July 1, 1968.

5. The assets and liabilities of the Staff Retirement Fund are not included in this Balance Sheet.

6. Represents currencies borrowed under Article VII, Section 2(i), of the Articles of Agreement.

7. The charge for a stand-by arrangement is credited against the service charge for funds drawn under that arrange-ment which raise the Fund's holding of currency above 100 per cent of the member's quota. A member that can-cels a stand-by arrangement will be paid a refund, which will be the prorated portion of the remaining stand-bycharge.

186


Appendix VI (continued)Exhibit A

SHEET30, 1968

basis of established parities or provisional rates

CAPITAL, RESERVES, AND LIABILITIES

CAPITALSubscriptions of members $21,119,350,000

RESERVES (Exhibit C)Special reserveGeneral reserve . .

$262,892,557291,267,499 554,160,056

SUBSCRIPTIONS IN RESPECT OF INCREASES IN QUOTASCONSENTED TO BUT NOT YET EFFECTIVE

Balances not due (Contra)Partial payments

$51,200,000700,000 51,900,000

INDEBTEDNESS (See Note 6)To Participants under General

Arrangements to BorrowOther

$490,000,000250,000,000 740,000,000

PROVISION FOR POTENTIAL REFUNDS OFSTAND-BY CHARGES (See Note 7) . 4,764,356

OTHER LIABILITIES (See Note 5)

TOTAL CAPITAL, RESERVES, AND LIABILITIES

3,932,737

$22,474,107,149

/s/ OSCAR L. ALTMANTreasurer

/s/ FRANK A. SOUTHARD, JR.Acting Managing Director

187


Appendix VI (continued)Exhibit B

STATEMENT OF INCOME AND EXPENDITURE

for the year ended April 30, 1968

INCOME

Operational chargesCharges on balances in excess of quotasOther

TOTAL INCOME (See Note 1)

EXPENDITURE

$ 7,404,60382,028,681

9,472

$89,442,756

Administrative expenditureBoard of Governors $ 835,961

Executive DirectorsSalaries and expense allowances $1,324,075Other compensations and benefits 294,829Travel 333,076 1,951,980

StaffSalaries $8,955,035Other compensations and benefits 3,080,731Travel 2,226,981 14,262,747

Special services to member countries 1,774,917

Other administrative expensesCommunications $626,683Office occupancy expenses 478,960Books and printing (See Note 2) 351,673Supplies and equipment 494,556Miscellaneous (See Note 3) 521,962 2,473,834

Total administrative expenditure $21,299,439

Operational expenditureInterest on indebtedness

Under General Arrangementsto Borrow $8,188,125

Other 3,750,000Gold handling and sundry

other costs (net) 6,952

Total operational expenditure 11,945,07-7

Fixed property expenditure 454,515

TOTAL EXPENDITURE 33,699,031

NET INCOME $55,743,725(Transferred provisionally to General Reserve pending =

Board of Governors' action) (Exhibit C)

NOTES:1. Excludes income from investments amounting to $39,750,857 transferred to Special Reserve

(Exhibit C).2. After deduction of $79,649 for sales of Fund's publications.3. After deduction of $252,909 for food service sales.

188


Appendix VI (continued)Exhibit C

STATEMENT OF RESERVES

for the year ended April 30, 1968

SPECIAL RESERVE (See Note)

Balance, April 30, 1967

AddIncome from investments in U.S. Government

securities


GENERAL RESERVE


Deduct

Transfer to Staff Retirement Fundfor past service costs relatingto previous years

Add

Net income (Exhibit B), transferredprovisionally pending Board of Governors' action .


TOTAL RESERVES (per Balance Sheet)

$223,141,700

39,750,857

$236,783,492

1,259,718

$235,523,774

55,743,725

$262,892,557

291,267,499

$554,160,056

NOTE:Consists of income from investments in U.S. Government securities from November 1, 1957.

189



STAFF RETIREMENT FUND

MEMORANDUM BY THE AUDIT COMMITTEE

June 21, 1968

To the Managing Directorand the Executive Directors


The report of the Audit Committee, dated June 21, 1968, submitted through you tothe Board of Governors, on the audit of the financial records and transactions of theInternational Monetary Fund for the fiscal year ended April 30, 1968, includes thefollowing paragraphs relating to the scope of the audit conducted, the audit certificategiven and the investments held with respect to the Staff Retirement Fund:

SCOPE OF THE AUDIT

The Audit Committee has examined the separate accounts and financial statementsrelating to the Staff Retirement Fund for the year ended April 30, 1968. In the courseof the examination, the Committee referred to the Articles of the Staff Retirement Planand to the decisions of the Pension, Administration and Investment Committeescreated under the Plan. The Audit Committee made what it considered an adequatetest check of the various classes of transactions, taking into account the audit coverageof the Internal Auditor, whose report to the Committee showed that a detailed exam-ination had been made of the participants' accounts.

AUDIT CERTIFICATE

In our opinion, the Balance Sheet, Statement of Source and Application of Funds,and the related Schedules of Participants' Account, Accumulation Account, RetirementReserve Account, and Reserve Against Investments present fairly the financial positionof the Staff Retirement Fund at April 30, 1968 and the results of its operations forthe year then ended, in conformity with generally accepted accounting principles appliedon a basis consistent with that of the preceding year.

INVESTMENTS

A change in the General Rules on Investment was made by the Pension Committeeduring the year in order to lower the floor on the holdings of obligations of theU.S. Government from 25 per cent to 20 per cent.

Holdings of the various classes of investments at April 30, 1968 were within thelimiting percentages, stated in original investment values, prescribed by the PensionCommittee, as follows:

190



Percentage PercentageA uthorized Held

BondsU.S. Government Minimum 20 24.18International Bank for Reconstruction and Development and

Inter-American Development Bank Maximum 20 13.85Corporate (other than convertible) Maximum 25 22.99Corporate (convertible) Maximum 5 0.13

Total bonds 61.15

Corporate stocks Maximum 50 38.85

Total portfolio 100.00

The Audit Committee received directly from the depository confirmation of the invest-ments held as at April 30, 1968.

AUDIT COMMITTEE:

s/ G. R. Long, Chairman (Canada)

/s/ Teferra Liben (Ethiopia)

/s/ F. Estevez (Spain)

191


Appendix VI (concluded)Exhibit I

STAFF RETIREMENT FUND

BALANCE SHEET

as at April 30, 1968

ASSETS

CASH AT BANKS $ 82,422

INVESTMENTSBonds, at amortized cost

United States Government $5,480,865(market value, $4,221,849)

International Bank for Recon-struction and Development andInter-American Development Bank 3,182,533(market value, $2,657,835)

Corporate 5,392,405(market value, $4,667,883)

Corporate convertible 30,000 $14,085,803(market value, $31,950)

Stocks (common), at cost 10,784,530 24,870,333(market value $13,563,717)

ACCRUED INTEREST ON BONDS AND CONTRIBUTIONSFROM PARTICIPANTS AND EMPLOYER 215,077

TOTAL ASSETS $25,167,832

LIABILITIES AND RESERVES

PARTICIPANTS' ACCOUNT $ 4,968,805

ACCUMULATION ACCOUNT 15,662,877

RETIREMENT RESERVE ACCOUNT 3,358,071

RESERVE AGAINST INVESTMENTS 1,178,079

TOTAL LIABILITIES AND RESERVES $25,167,832

/s/ OSCAR L. ALTMANTreasurer

/s/ FRANK A. SOUTHARD, JR.Acting Managing Director

192


INDEX


INDEXNumbers refer to pages. An asterisk (*) denotes a table, a dagger (t) denotes a chart.

AFGHANISTAN — drawing, 99*; repur-chase from Fund, 103*; stand-byarrangement, 100*

AFRICA — balance of payments and re-serves, 33, 73*, 74, 122-23*; eco-nomic developments, 68; exportearnings, 61*, 63*, 66*; gold, for-eign exchange, and reserve positionin Fund, 41*; international trade,60, 61, 62t, 63, 67, 68-70; inter-national trade of Equatorial Africa,69*; international trade of WestAfrica, 69*; see also individualcountries

AFRICAN DEVELOPMENT BANK — Fundrelations with, 110

AGRICULTURAL PRODUCTS — prices, 64,65 1

ALGERIA — economic developments, 70;Fund quota increase, 98*; goldpurchases, 89*; international trade,69*

ANGOLA — international trade, 69*ANTIGUA — par value changed, 96*ARGENTINA — balance of payments and

reserves, 32, 73*, 74, 122-23*; cur-rency used in Fund transactions, 20,104*; economic developments, 70,71; export earnings, 66*; interna-tional trade, 63, 71*; repurchasefrom Fund, 103*; stand-by arrange-ments, 98, 100*

ARTICLES OF AGREEMENT — see FUNDARTICLES OF AGREEMENT

ASIA — balance of payments and re-serves, 33, 73*, 122-23*; exportearnings, 61*, 63*, 66*, 67; gold,foreign exchange, and reserve posi-tion in Fund, 41*; internationaltrade, 60, 62t, 63, 67, 68; see alsoindividual countries

ASIAN DEVELOPMENT BANK — Fundrelations with, 110

AUSTRALIA — balance of payments andreserves, 7, 32, 33*, 35t, 81*, 122-23*; capital market, 57*; currencyused in Fund transactions, 20, 104*;economic developments, 78, 79; ex-port earnings, 61*, 63*, 66*; fiscalpolicy, 79; Fund Article VIII, ac-ceptance of, 95*; gold, foreign ex-change, and reserve position inFund, 41*; gold production, 87,88*; gold subsidy program, 92;gross national product, 79; inter-national trade, 60, 62 1, 63, 79, 80*

AUSTRIA — balance of payments andreserves, 34*; currency used inFund transactions, 20, 104*; dis-count rate, 48-49; Fund ArticleVIII, acceptance of, 95*; goldpolicy, 84; gold purchases, 89*; in-ternational trade, 30*; monetarypolicy, 48-49

BALANCE OF PAYMENTS — 3, 32-39,113-23*; industrial countries, 3, 5,7, 32, 33-39, 113-21*; primary pro-ducing countries, 7, 32-33, 35 1,122-23*; primary producing coun-tries, less developed, 7, 32-33, 35t,122-23*; primary producing coun-tries, more developed, 7, 32, 122-23*; see also individual countries

BANK FOR INTERNATIONAL SETTLE-MENTS — Fund relations with, 110;gold transactions, 85*; swap trans-actions, 42

BELGIUM — capital market, 52; cur-rency used in Fund transactions,20, 104*; discount rate, 48-49, 50;employment, 5, 45; fiscal policy,46, 47; Fund Article VIII, accept-ance of, 95*; gold transactions, 42,89*; gross national product, 44; in-terest rates, 56; monetary policy,48-49, 50; prices, 5, 46; swap trans-actions, 40; wages, 5; see alsoBELGIUM-LUXEMBOURG

BELGIUM-LUXEMBOURG — b alance ofpayments and reserves, 34*, 37*,113*; gold, foreign exchange, andreserve position in Fund, 41*; grossnational product, 44; industrial pro-duction, 44 1; international trade,30*, 31

BERMUDA — par value changed, 96*BOARD OF GOVERNORS — see FUND

BOARD OF GOVERNORSBOLIVIA — balance of payments and re-

serves, 122-23*; drawing, 99*; eco-nomic developments, 70, 72; exportearnings, 66*; Fund Article VIII,acceptance of, 21, 95; internationaltrade, 71*; stand-by arrangements,100*, 101

BONDS, GOVERNMENT— yields, 54, 55BONDS, INDUSTRIAL — yields, 54, 56 1BOTSWANA — membership in Fund,

terms and conditions approved for,95

BRAZIL — balance of payments and re-serves, 73*, 74, 122-23*; coffeeprices, 65 1; currency used in Fundtransactions, 20, 104*; economicdevelopments, 70, 71, 72, 76-77;export earnings, 66*; gold sales,89*; industrial production, 72; in-flation, 76; international trade, 71*,77; repurchase from Fund, 103*;stand-by arrangements, 100*, 101

BRITISH H O N D U R A S — par valuechanged, 96*

BRUNEI — currency unit changed, 96BURMA — balance of payments and

reserves, 122-23*; drawings, 99*,101*; economic developments, 68;Fund quota increase, 97; interna-tional trade, 67*

BURUNDI — drawing, 99*; repurchasefrom Fund, 103*; stand-by arrange-ments, 100*, 101

CAMBODIA — economic developments,68; international trade, 67*

CAMEROON — international trade, 69*CANADA — balance of payments and

reserves, 33, 34*, 36, 37*, 114*;bonds, government, yields on, 55 1;bonds, industrial, yields on, 56 1;capital market, 52, 53, 54, 55, 56,57*; capital movements, 36, 37*,53, 54, 59; cost of living, 46t; cur-rency used in Fund transactions,104*; discount rate, 48t, 49-50;drawing, 19, 98, 99*, 104*; eco-nomic policy, 10; economic situa-tion, 4, 5; employment, 5, 45; fiscal

195

policy, 4, 5, 47-48; Fund ArticleVIII, acceptance of, 95*; gold, for-eign exchange, and reserve positionin Fund, 41*; gold policy, 84; goldprice, 84; gold production, 87, 88;gold sales, 89*; gold subsidy pro-gram, 92; gross national product,44; industrial production, 5, 44; in-terest rates, 53t, 54, 55, 57t; inter-national trade, 28t, 29, 30*, 31;loan to Fund repaid, 107; monetarypolicy, 5, 48-49, 50; prices, 5, 46;wages, 45, 46; wheat prices, 65 1

CAPITAL MARKETS — industrial coun-tries, 5, 51-58; see also individualcountries

CAPITAL MOVEMENTS — indus t r ia lcountries, 36-39, 58-59; primaryproducing countries, less developed,7; see also individual countries

CENTRAL BANKING SERVICE — see FUNDORGANIZATION AND ADMINISTRATION

CENTRO DE ESTUDIOS MONETARIOSLATINOAMERICANOS — 2 1 -22

CEYLON — balance of payments andreserves, 74, 122-23*; drawings,99*, 101*; economic developments,68; international trade, 67*; parvalue changed, 96*, 97; stand-byarrangement, 100*; tea prices, 65 1

CHAD — economic developments, 68:Fund quota increase, 98*

CHILE — balance of payments and re-serves, 73*, 74, 75, 122-23*; copperprices, 65 1; drawings, 99*; eco-nomic developments, 70-71, 72, 75;export earnings, 66*; Fund quotaincrease, 98*; inflation, 75; inter-national trade, 71*; repurchasefrom Fund, 103*; stand-by arrange-ment, 98, 100*

CHINA, MAINLAND — gold purchases,85; international trade, 60, 61*

CHINA, REPUBLIC OF — balance of pay-ments and reserves, 33, 73*, 74,122-23*; economic developments,68; export earnings, 63*; gross na-tional product, 68; internationaltrade, 67*

COCOA — prices, 64, 65 1, 66*, 67COFFEE — prices, 64, 65 1, 66*, 67COLOMBIA — balance of payments and

reserves, 73*, 74, 122-23*; coffeeprices, 65t; drawings, 99*, 101*;economic developments, 71, 72; ex-port earnings, 66*; gold produc-tion, 88*; international trade, 71*;repurchase from Fund, 103*; stand-by arrangements, 100*, 101

COMMODITY PRICES — see PRICESCOMPENSATORY FINANCING — see FUND

TRANSACTIONSCONGO (BRAZZAVILLE) — economic

developments, 68; Fund quota in-crease, 98*

CONGO, DEMOCRATIC REPUBLIC OF —balance of payments and reserves,74; currency unit changed, 96; eco-nomic developments, 70; exportearnings, 66*; Fund quota increase,98*; gold production, 88*; repur-chase from Fund, 103*; stand-byarrangement, 98-99, 100*

COPPER — prices, 64, 65 1, 66*, 67


196 INDEX

COSTA RICA — balance of paymentsand reserves, 122-23*; drawing,99*; economic developments, 72;Fund Article VIII, acceptance of,95*; international trade, 71*; re-purchase from Fund, 103*; stand-by arrangement, 100*, 101

COST OF LIVING — industrial countries,46t

COTTON — prices, 64, 65 1, 66*COUNCIL FOR MUTUAL ECONOMIC AS-

SISTANCE COUNTRIES — 27; interna-tional trade, 60, 61*

CURRENCY DEVALUATIONS — U.K., 3,8, 31, 39, 43, 50-51; primary pro-ducing countries, 7; see also FUNDMEMBERS: par values

CYPRUS — balance of payments and re-serves, 122-23*; par value changed,96*, 97; repurchase from Fund,103*

DAHOMEY — Fund quota increase, 98*DENMARK — balance of payments and

reserves, 34*; currency devaluation,43; currency used in Fund transac-tions, 104*; discount rate, 49*;Fund Article VIII, acceptance of,21, 95; international trade, 30; parvalue changed, 96*, 97

DISCOUNT RATES — industrial coun-tries, 43, 48t, 49*

DOMINICA — par value changed, 96*DOMINICAN REPUBLIC — balance of

payments and reserves, 122-23*;drawing, 101*; economic develop-ments, 72; Fund Article VIII, ac-ceptance of, 95*; Fund quota in-crease, 98*; international trade,71*; repurchase from Fund, 103*

DRAWINGS — see FUND TRANSACTIONSand individual countries

EAST AFRICA — sisal prices, 65 1ECUADOR — balance of payments and

reserves, 122-23*; economic devel-opments, 71; international trade,71*; repurchase from Fund, 103*;stand-by arrangement, 100*

EDIBLE OILS — prices, 65 1EL SALVADOR — balance of payments

and reserves, 122-23*; drawing,99*; economic developments, 72;Fund Article VIII, acceptance of,95*; international trade, 71*; re-purchase from Fund, 103*; stand-byarrangement, 99, 100*

EMPLOYMENT — industrial countries,45-46

ETHIOPIA — balance of payments andreserves, 74, 122-23*; economic de-velopments, 69; international trade,69*

EURO-CURRENCY MARKETS — 38, 39,42,51,52-53, 54

EURO-ISSUES— 37, 55t, 56-57, 58EUROPE — balance of payments and re-

serves, 3, 6, 8, 11, 33-34, 35t, 36,81*; capital market, 52, 53, 55, 57,58; capital movements, 36, 37, 38,53, 58; economic situation, 4-5;employment, 45; export earnings,61*, 63*; fiscal policy, 5; gold, for-eign exchange, and reserve position

in Fund, 40, 41*, 42; industrialproduction, 27; international trade,25*, 27, 28t, 29, 31, 60, 61, 62t,63, 80*; monetary policy, 5; prices,5, 6; see also individual countries

EUROPEAN ECONOMIC COMMUNITY —balance of payments and reserves,34*, 35t, 36; capital market, 57*;cost of living, 46 1; industrial pro-duction, 44 1; international trade,28t, 29, 31; prices, 46t; wages,45 1; see also individual countries

EUROPEAN FREE TRADE ASSOCIATION— international trade, 28t, 29, 31*;see also individual countries

EUROPEAN FUND — gold transactions,85*

EXECUTIVE DIRECTORS — see FUND EX-ECUTIVE BOARD

EXPORT EARNINGS — 61*, 63*, 66*;see also individual countries

F A L K L A N D ISLANDS — par valuechanged, 96*

FIJI — par value changed, 96*FINLAND — balance of payments and

reserves, 81*, 122-23*; currencydevaluation, 80; drawings, 99*; eco-nomic developments, 78, 80; inter-national trade, 80; par valuechanged, 96*; stand-by arrange-ment, 100*

FISCAL POLICY — industrial countries,4-5, 43, 46-48

FRANCE — balance of payments and re-serves, 34*, 36, 37*, 115*; bonds,industrial, yields on, 56 1; capitalmarket, 37, 52, 56; capital move-ments, 37*, 59; currency used inFund transactions, 20, 104*; dis-count rate, 48t, 49*, 50; drawing,19, 107; economic policy, 10, 43;economic situation, 5; employment,5, 45; fiscal policy, 46-47; FundArticle VIII, acceptance of, 95*;gold, foreign exchange, and reserveposition in Fund, 41; gold market,90-91; gold policy, 87; gold prices,90-91; gold purchases, 89*; grossnational product, 4t, 44; industrialproduction, 5, 26 1, 44 1; interestrates, 53 1; international trade, 261",30*, 31; monetary policy, 5, 49, 50;prices, 5, 46; wages, 5, 46 1

FUND ARTICLES OF AGREEMENT —Amendment, Proposed, 12-16, 17,95, 127, 154-70; Article III, Section2, adjustment of quotas, 12; ArticleV, Section 7, repurchase of cur-rency, 16; Article V, Section 7(6),repurchase obligations, 103-104,127; Article V, Section 8(/), pay-ment of Fund charges, 107; ArticleVII, scarce currencies, 107; ArticleVIII, Sections 2, 3, and 4, accept-ance of, 17, 95; Article VIII, Sec-tions 2, 3, and 4, consultations, 21,108; Article XII, Section 6 (a) and(£), distribution of net income, 22;Article XIV, Section 2, consulta-tions, 21, 108

FUND ASSISTANCE TO MEMBERS — seeFUND SERVICES TO MEMBERS

FUND BOARD OF GOVERNORS — deci-sions under Proposed Amendment

to Articles of Agreement, 16; Reso-lution on Proposed Amendment toArticles of Agreement, 12, 14, 127,153-54; Resolution 22-8: Establish-ment of a Facility Based on SpecialDrawing Rights in the Fund andModifications in the Rules andPractices of the Fund, 17, 127;Resolution 22-9: Stabilization ofPrices of Primary Products, 17, 110;Standing Committee on Interpreta-tion to be created, 16; to considerdistribution of net income, 22

FUND CONSULTATIONS WITH MEMBERS—21, 108

FUND CURRENCY HOLDINGS — seeFUND RESOURCES

FUND EXECUTIVE BOARD — 95; Execu-tive Directors, list and voting power,175-77; membership changes, 178-80; proposal on distribution of netincome, 22; report on ProposedAmendment to Articles of Agree-ment, 129-74

FUND EXECUTIVE BOARD DECISIONS —7 ( 648 ) , voluntary repurchases, 1 03705-(57/55), minimal repurchaseobligations procedure, 127; 1034-(60/27), Article VIII and ArticleXIV, 108; 137H62/36), currenciesfor use in repurchase, 104; 1813-(65/4), calculation of repurchaseobligations, 127; 2493-(68/74),Proposed Amendment to Articles ofAgreement, 128; 2499-(68/77), Re-purchases: Small Amounts Includedin Article V, Section 7(b) Obliga-tions, 127

FUND FINANCIAL STATEMENTS — 181-92

FUND GOLD HOLDINGS — see FUND RE-SOURCES

FUND M A N A G I N G DIRECTOR — ad-dresses, etc., 83, 110

FUND MEMBERS — applications to be-come, 95; currency devaluations, 8,17; new, 18, 95; par values, 18, 95,96-97; terms and conditions formembership approved, 95

FUND ORGANIZATION AND ADMINISTRA-TION — Audit Committee, 111, 185,190-91; budget, 111, 181-82; Cen-tral Banking Service, 108-109;Fiscal Affairs Department, 108; in-come, expenditure, and reserves, 22,111, 182, 183, 188, 189; IMF Insti-tute, 109; publications, 110, 111-12;staff, 111; Staff Retirement Fund,184, 190-92; see also FUND BOARDOF GOVERNORS, FUND EXECUTIVEBOARD, an d FUND MANAGING DIREC-TOR

FUND QUOTAS — increases, 18, 97, 98*FUND RELATIONS WITH OTHER INTER-

NATIONAL ORGANIZATIONS — 109-11 ;see also individual organizations

FUND RESOURCES — General Arrange-ments to Borrow, 19, 20, 21, 85, 98,102, 104, 107; gold and currencyholdings, 85; U.S. securities, in vest-ment in, 186, 189

FUND SERVICES TO MEMBERS — IMFInstitute, 21, 109; technical assist-ance, 21, 108-109; see also FUND


INDEX 197

ORGANIZATION AND ADMINISTRA-TION: Central Banking Service,Fiscal Affairs Department

FUND TRANSACTIONS — 18-21; chargesto members, 105, 107; compensa-tory financing, 19, 97, 98*, 99*,101-102; currencies used by Fund,20-21, 103-105; drawings, 18-19,97-98, 99*, 101, 104*, 105*, 106t;financial agreement with Switzer-land, 108; gold transactions, 85*;interest payments, 105, 107; repay-ment to Canada, 107; replenishmentof currencies, 107-108; repurchasesby members, 19-20, 102-103, 104*,105*; stand-by arrangements, 19,98, 99-101, 105*, 106t; summary,105; waivers, 102

FUND WORK ON INTERNATIONAL LI-QUIDITY, 1963-68—12-14

GABON — economic developments, 68;Fund quota increase, 98*

GAMBIA, THE — exchange rate changeagreed with Fund, 97; membershipin Fund, 18, 95; par value estab-lished, 97

GENERAL AGREEMENT ON TARIFFS ANDTRADE — Fund relations with, 110

GENERAL ARRANGEMENTS TO BORROW— see FUND RESOURCES

GERMANY — balance of payments andreserves, 7, 33-34, 36, 37, 38, 39*,116*; bonds, government, yields on,55 1; bonds, industrial, yields on,56t; capital market, 52, 56, 57-58;capital movements, 36, 37, 38, 39,57-58; currency used in Fund trans-actions, 20, 104*; discount rate, 48,49*; economic situation, 4, 5, 43;employment, 5, 45; fiscal policy, 46;Fund Article VIII, acceptance of,95*; gold, foreign exchange, andreserve position in Fund, 40, 41*,42; gold policy, 84; gross nationalproduct, 4, 44; industrial produc-tion, 5, 26t, 27, 43-44; interestrates, 53 1, 56; international trade,27, 28t, 29, 30, 31; monetarypolicy, 5, 48-49, 50; prices, 5, 45,46; swap transactions, 40-41, 42;wages, 5, 45, 46t

GHANA — balance of payments and re-serves, 73*, 74, 122-23*; cocoaprices, 65 1; drawings, 99*, 101*;economic developments, 68, 76; ex-port earnings, 66*; gold production,87, 88*; gross national product, 68;international trade, 69*; par valuechanged, 96*; prices, 76; repurchasefrom Fund, 103*; stand-by arrange-ments, 100*, 101

GIBRALTAR — par value changed, 96*GOLD — absorption by private holders,

industry, and arts, 85-87, 89*; de-mand for, 3, 42, 43, 54, 83, 90;holdings, 32, 39-40, 84-87; markets,90-92; movements, 89-90; nationalpolicies affecting, 83-84; price, 3, 9,43, 83, 90-92; production, 84-85,86t, 87-88; subsidy programs, 92;see also FUND TRANSACTIONS

GOLD POOL— 3, 9, 42, 43, 83, 89-90GREECE — balance of payments and re-

serves, 81*, 122-23*; economic de-

velopments, 82; international trade,80*

GROSS NATIONAL PRODUCT — industrialcountries, 4, 5, 44-45; primary pro-ducing countries, 6

GROUP OF TEN — report on interna-tional liquidity, 13

G U A T E M A L A — balance of paymentsand reserves, 122-23*; drawings,99*, 101*; economic developments,72; Fund Article VIII, acceptanceof, 95*; international trade, 71*;repurchase from Fund, 103*; stand-by arrangements, 100*, 101

GUYANA — Fund Article VIII, accept-ance of, 95*; international trade,71*; par value changed, 96*, 97;stand-by arrangements, 100*, 101

HAITI — balance of payments and re-serves, 122-23*; drawings, 99*,101*; Fund Article VIII, accept-ance of, 95*; repurchase fromFund, 103*; stand-by arrangement,100*

HONDURAS — balance of payments andreserves, 122-23*; economic devel-opments, 72; Fund Article VIH,acceptance of, 95*; internationaltrade, 71*; repurchase from Fund,103*; stand-by arrangement, 99,100*

HONG KONG — export earnings, 63*;gold prices, 92; international trade,67*; par value changed, 96*

ICELAND — balance of payments andreserves, 81*, 122-23*; currencydevaluation, 80; drawings, 99*,101*; economic developments, 78,80; export earnings, 80; interna-tional trade, 80*; par valuechanged, 96*, 97

INCOME, PROPOSED DISTRIBUTION OFFUND'S NET — 22

INDIA — balance of payments and re-serves, 73*, 74, 122-23*; discountrate, 77; drawings, 99*, 101*; eco-nomic developments, 67, 77; goldprices, 92; gross national product,67-68; international trade, 67*, 77;repurchase from Fund, 103*

INDONESIA — balance of payments andreserves, 73*, 74, 122-23*; draw-ing, 98, 99*; economic develop-ments, 68, 77-78; export earnings,66*; fiscal measures, 78; goldpolicy, 84; inflation, 77; interna-tional trade, 67*; prices, 77-78; re-purchase from Fund, 103*; stand-byarrangement, 99, 100*, 101

INDUSTRIAL COUNTRIES — 3, 4-6, 27;balance of payments and reserves,3, 5, 7, 32, 33-39; capital markets,51-58; capital movements, 36-39,58-59; discount rates, 43; drawings,1061"; economic situation, 3, 4-5,43-59; employment, 45; fiscalpolicy, 5, 43, 46-48; gold, foreignexchange, and reserve position inFund, 40, 41*; gross national prod-uct, 4, 5, 44-45; industrial produc-tion, 26t, 43-44, 64t; interest rates,48-50; international trade, 6, 25-29,30-32, 61-63; markets for primary

producing countries, 60-63; mone-tary policy, 43, 48-50; prices, 43,45-46; stand-by arrangements, 106t;wages, 43, 45 1

INDUSTRIAL PRODUCTION — industrialcountries, 26t, 43, 44t, 64t

INTER-AMERICAN DEVELOPMENT BANK— Fund relations with, 110

INTEREST RATES — industrial countries,48-50, 53t, 57t; see also DISCOUNTRATES

INTERNATIONAL BANK FOR RECON-STRUCTION AND DEVELOPMENT(WORLD BANK) — Fund relationswith, 110, 111

INTERNATIONAL LIQUIDITY — 12-14INTERNATIONAL MONETARY FUND —

see FUNDI N T E R N A T I O N A L ORGANIZATIONS —

Fund relations with, 109-11INTERNATIONAL TRADE — see WORLD

TRADE and individual countriesIRAN — balance of payments and re-

serves, 73*, 122-23*; drawing, 99*;economic developments, 70; exportearnings, 63*; international trade,69*; repurchase from Fund, 103*

IRAQ — balance of payments and re-serves, 73, 122-23*; drawings, 99*,101*; economic developments, 70;international trade, 69*; repurchasefrom Fund, 103*

IRELAND — balance of payments andreserves, 81*, 122-23*; currencyused in Fund transactions, 20, 103,104*; economic developments, 78,79; Fund Article VIII, acceptanceof, 95*; gross national product, 79;international trade, 79, 80*; parvalue changed, 96*, 97; repurchasefrom Fund, 103*

ISRAEL — balance of payments and re-serves, 32, 73*, 122-23*; economicdevelopments, 70; export earnings,63*; international trade, 69*; parvalue changed, 96*, 97

ITALY — balance of payments and re-serves, 34*, 36, 37, 38, 39*, 117*;bonds, government, yields on, 55 1;bonds, industrial, yields on, 56t;capital market, 52; capital move-ments, 37, 38, 39*; currency usedin Fund transactions, 20, 104*; dis-count rate, 48 1; economic situation,5, 44-45; employment, 45; FundArticle VIII, acceptance of, 95*;gold, foreign exchange, and reserveposition in Fund, 40, 41*, 42; goldpolicy, 84; gold transactions, 89*;gross national product, 4; industrialproduction, 26 1, 27, 44 1; interestrates, 56; international trade, 26t,27, 29, 30*, 32; monetary policy,50; prices, 46; swap transactions,40; wages, 46 1

IVORY COAST — balance of paymentsand reserves, 122-23*; export earn-ings, 66*; Fund quota increase, 98*;international trade, 69*

JAMAICA — balance of payments andreserves, 122-23*; Fund ArticleVIII, acceptance of, 95*; interna-tional trade, 71*; par valuechanged, 96*, 97


198 INDEX

JAPAN — balance of payments and re-serves, 7, 33-34, 36, 37*, 38, 118*;capital market, 52, 53, 57*; capitalmovements, 36, 37*, 38, 59; cost ofliving, 46 1; currency used in Fundtransactions, 104*; discount rate,48 1, 49*, 50; economic policy, 10;economic situation, 5, 44-45; fiscalpolicy, 4, 45, 48; Fund ArticleVIII, acceptance of, 95*; gold, for-eign exchange, and reserve positionin Fund, 41*; gold policy, 84; goldproduction, 87, 88*; gross nationalproduct, 4; industrial production,26t, 44t; international trade, 25*,26t, 27, 28t, 29, 30*, 31, 32, 61,62t, 63; monetary policy, 45, 50;prices, 45, 46; wages, 45, 46 1

JORDAN — balance of payments andreserves, 32, 73*, 74, 122-23*; eco-nomic developments, 70; Fundquota increase, 98*; internationaltrade, 69*

KENYA — balance of payments and re-serves, 122-23*; economic develop-ments, 69; international trade, 69*

KOREA — balance of payments and re-serves, 33, 73*, 74, 122-23*; eco-nomic developments, 68; exportearnings, 63*; Fund quota increase,97, 98*; gross national product, 68;international trade, 67*; stand-byarrangements, 100*, 101

KUWAIT — Fund Article VIII, accept-ance of, 95*; international trade,69*

LATIN A M E R I C A — export earnings,61*; international trade, 60, 67; seealso WESTERN HEMISPHERE and in-dividual countries

LEAD — prices, 64, 65 1LEBANON — gold policy, 87; gold

prices, 92; international trade, 69*LESOTHO — membership in Fund, terms

and conditions approved for, 95LIBERIA — drawing, 99*; repurchase

from Fund, 103*; stand-by arrange-ments, 100*, 101

LIQUIDITY — see INTERNATIONAL LI-QUIDITY

LIBYA — balance of payments and re-serves, 73*, 74, 122-23*; economicdevelopments, 68, 70; internationaltrade, 69*

LUXEMBOURG — Fund Article VIII,acceptance of, 95*; Fund quota in-crease, 98*; see also BELGIUM-LUXEMBOURG

MAIZE — prices, 65 1MALAGASY REPUBLIC — international

trade, 69*MALAWI — balance of payments and re-

serves, 122-23*; par value changed,96*, 97

MALAYSIA — balance of payments andreserves, 74, 122-23*; currency unitchanged, 95; economic develop-ments, 68; export earnings, 66*;Fund quota increase, 98*; grossdomestic product, 68; internationaltrade, 67*; repurchase from Fund,103*; rubber prices, 65 1; tin prices,65 1

MALI — drawing, 99*; economic devel-opments, 69; repurchase from Fund,103*; stand-by arrangement, 99-101

MALTA — membership in Fund, appli-cation for, 95

MANUFACTURING COUNTRIES — see IN-DUSTRIAL COUNTRIES

MARTINIQUE — international trade, 71*MAURITANIA — Fund quota increase,

98*MAURITIUS — membership in Fund, ap-

plication for, 95; par value changed,96*

METALS — see MINERALS AND METALSMEXICO — balance of payments and

reserves, 73*, 74, 122-23*; cottonprices, 65 1; currency used in Fundtransactions, 20, 104*; economicdevelopments, 71, 72; export earn-ings, 66*; Fund Article VIII, ac-ceptance of, 95*; gold production,88*; international trade, 71*

MIDDLE EAST — balance of paymentsand reserves, 32, 33*, 73-74, 122-23*; export earnings, 61*, 63*;gold, foreign exchange, and reserveposition in Fund, 41*; internationaltrade, 61, 62t, 63, 67, 69*, 70

MINERALS AND METALS — prices, 64,65t

MONETARY POLICY — industrial coun-tries, 43, 48-50; see also individualcountries

MONTSERRAT — par value changed, 96*MOROCCO — balance of payments and

reserves, 122-23*; economic devel-opments, 70; Fund quota increase,98*; international trade, 69*; stand-by arrangements, 100*, 101

M O Z A M B I Q U E — international trade,69*

NEPAL — par value established, 96*, 97NETHERLANDS — balance of payments

and reserves, 34*, 37*, 119*; bonds,government, yields on, 55 1; capitalmarket, 52; capital movements, 37*,59; currency used in Fund transac-tions, 20, 104*; discount rate, 48-49; economic situation, 5; employ-ment, 5, 45; fiscal policy, 46, 47;Fund Article VIII, acceptance of,95*; gold, foreign exchange, andreserve position in Fund, 41*, 42;gold policy, 84, 92; gold prices, 92;gold purchases, 89*; gross nationalproduct, 44; industrial production,5, 44t; interest rates, 53t, 57t; in-ternational trade, 30*, 31; monetarypolicy, 5, 49, 50; prices, 5, 46; swaptransactions, 40; wages, 5

NETHERLANDS ANTILLES — interna-tional trade, 71*

NEW ZEALAND — balance of paymentsand reserves, 7, 32, 33*, 35 1, 81*,122-23*; capital market, 57*; cur-rency devaluation, 80; drawings,99*, 101*; economic developments,78, 80; export earnings, 61*, 63*,66*; gold, foreign exchange, andreserve position in Fund, 41*; inter-national trade, 60, 62 1, 63, 80; parvalue changed, 95, 96*, 97; repur-chase from Fund, 103*; stand-byarrangement, 100*, 101; woolprices, 65t, 79-80

NICARAGUA — balance of payments andreserves, 122-23*; economic devel-opments, 72; Fund Article VIII,acceptance of, 95*; internationaltrade, 71*; repurchase from Fund,103*; stand-by arrangement, 100*,101

NIGER — Fund quota increase, 98*NIGERIA — balance of payments and

reserves, 73*, 74, 122-23*; draw-ing, 98, 99*; economic develop-ments, 68, 69; export earnings, 66*;Fund quota increase, 97, 98*; inter-national trade, 69*

NORTH AMERICA — capital market, 52,57*; international trade, 25*; seealso individual countries

NORWAY — balance of payments andreserves, 34*; currency used inFund transactions, 20, 104*; FundArticle VIII, acceptance of, 21, 95;international trade, 30*, 31

ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT —Fund relations with, 110

ORGANIZATION OF AMERICAN STATES— Fund relations with, 110

PAKISTAN — balance of payments andreserves, 73*, 74, 77, 122-23*; eco-nomic developments, 68, 77; fiscalmeasures, 77; gross national prod-uct, 68; international trade, 67*,68; repurchase from Fund, 103*

PANAMA — balance of payments andreserves, 122-23*; economic devel-opments, 72; Fund Article VIII,acceptance of, 95*; gross domesticproduct, 72; international trade,71*; repurchase from Fund, 103*

PAR VALUES — see FUND MEMBERS andindividual countries

PARAGUAY — balance of payments andreserves, 122-23*; economic devel-opments, 71; international trade,71*; stand-by arrangements, 100*,101

PERU — balance of payments and re-serves, 73*, 74, 122-23*; currencyused in Fund transactions, 104*;drawing, 99*; economic develop-ments, 70-71, 72, 75-76; exportearnings, 66*; fiscal measures, 76;Fund Article VIII, acceptance of,95*; Fund quota increase, 97, 98*;gold sales, 89*; gross national prod-uct, 72; international trade, 71*;stand-by arrangement, 100*, 101

PETROLEUM EXPORTERS — 60, 61, 64,68, 70, 73; balance of paymentsand reserves, 73; export earnings,63*; international trade, 63, 69*,71*

PHILIPPINES — balance of paymentsand reserves, 73*, 74, 122-23*;drawing, 99*; economic develop-ments, 68; gold production, 87, 88*;gold subsidy program, 92; gross na-tional product, 68; internationaltrade, 67*; stand-by arrangements,100*, 101

PORTUGAL — balance of payments andreserves, 81*, 122-23*; economicdevelopments, 82; internationaltrade, 80*


INDEX 199

PRICES — commodity, 3, 29, 63-67, 76;industrial countries, 43, 45-46; seealso COST OF LIVING

PRIMARY PRODUCING COUNTRIES — 3,6-7, 27; balance of payments andreserves, 7, 32-33, 35t, 122-23*;capital market, 57*; currency de-valuations, 7; economic develop-ments, 60-82; export earnings, 60-67; gold and foreign exchange re-serves, 7; gross national product, 6;imports by industrial countries, 60-63; international trade, 6, 27, 29-30,61*, 62t, 63*, 66*; see also PRI-MARY PRODUCING COUNTRIES, LESSDEVELOPED; PRIMARY PRODUCINGCOUNTRIES, MORE DEVELOPED; andindividual countries

PRIMARY PRODUCING COUNTRIES, LESSDEVELOPED — 27; balance of pay-ments and reserves, 7, 32-33, 35 1,72-74, 122-23*; capital movements,7; economic developments, 67-78;export earnings, 63*; gold, foreignexchange, and reserve position inFund, 41*; international trade, 30t,67*, 69*, 71*; see also individualcountries

PRIMARY PRODUCING COUNTRIES,MORE DEVELOPED — 27; balance ofpayments and reserves, 7, 32-33,81*, 122-23*; economic develop-ments, 78-82; export earnings, 63*;gold, foreign exchange, and reserveposition in Fund, 41*; internationaltrade, 3&t, 80*; see also individualcountries

QUOTAS OF FUND MEMBERS — seeFUND QUOTAS

RESERVE POSITION IN FUND — 8-9, 39,40,41

RESERVES, GOLD AND FOREIGN EX-CHANGE — 39-42; world, 8-10

RHODESIA — gold production, 88*; goldsubsidy program, 92; internationaltrade, 69*

RICE — prices, 64, 65 1RUBBER — prices, 64, 65 1, 66*, 67, 68RWANDA — drawing, 99*; Fund quota

increase, 98*; repurchase fromFund, 103*; stand-by arrangements,100*, 101

ST. CHRISTOPHER-NEVIS-ANGUILLA —par value changed, 96*

ST. LUCIA — par value changed, 96*ST. VINCENT — par value changed, 96*SAUDI ARABIA — balance of payments

and reserves, 122-23*; Fund ArticleVIII, acceptance of, 95*; interna-tional trade, 69*

SCANDINAVIAN COUNTRIES — borrowingin European capital market, 37,57*; see also individual countries

SECURITIES MARKETS — see CAPITALMARKETS

SENEGAL — international trade, 69*SEYCHELLES — par value changed, 96*SIERRA LEONE — balance of payments

and reserves, 122-23*; drawing,99*; economic developments, 69,76; international trade, 69*; parvalue changed, 96*, 97; prices, 76;stand-by arrangements, 100*, 101

SINGAPORE — balance of payments andreserves, 122-23*; currency unitchanged, 95; international trade,67*; par value established, 96*

SISAL — prices, 64, 65 1SOMALIA — balance of payments and

reserves, 122-23*; drawing, 99*;repurchase from Fund, 103*; stand-by arrangements, 100*, 101

SOUTH AFRICA — balance of paymentsand reserves, 7, 32, 33*, 35t, 79,81*, 122-23*; capital market, 57*;currency used in Fund transactions,20, 103, 104*; economic develop-ments, 78, 79; export earnings, 61*,63*, 66*; gold, foreign exchange,and reserve position in Fund, 41*;gold policy, 84; gold production,87, 88; gold subsidy program, 92;gross domestic product, 79; inter-national trade, 60, 62t, 63, 79, 80*

SPAIN — balance of payments and re-serves, 81*, 122-23*; currency de-valuation, 82; economic develop-ments, 78, 80, 82; gold purchases,89*; international trade, 80*, 82;par value changed, 96*, 97

SPECIAL DRAWING ACCOUNT — 15, 135-36, 142-43, 158-59, 163-64, 166,169-70, 171

SPECIAL DRAWING RIGHTS, ESTABLISH-MENT OF FACILITY BASED ON — 14-15, 129-74

STABILIZATION OF PRICES OF PRIMARYPRODUCTS — 17, 110

STAND-BY ARRANGEMENTS — see FUNDTRANSACTIONS and individual coun-tries

SUDAN — balance of payments and re-serves, 74, 122-23*; drawing, 99*;economic developments, 69-70; ex-port earnings, 66*; internationaltrade, 69*; repurchase from Fund,103*; stand-by arrangements, 100*,101

SUGAR — prices, 64SURINAM — international trade, 7 1 *SWAP TRANSACTIONS — 39*, 40-41, 42SWEDEN — balance of payments and

reserves, 34*; capital market, 52;currency used in Fund transactions,20, 104*; discount rate, 48-49, 50;fiscal policy, 46, 47; Fund ArticleVIII, acceptance of, 95*; interna-tional trade, 30, 31; monetarypolicy, 48-49, 50; prices, 46

SWITZERLAND — balance of paymentsand reserves, 34*; bonds, govern-ment, yields on, 55 1; bonds, indus-trial, yields on, 56t; capital market,56, 57; capital movements, 59; dis-count rate, 48-49; financial agree-ment with Fund, 108; gold, foreignexchange, and reserve position inFund, 41*, 42; gold market, 91-92;gold policy, 84, 87; gold prices,91-92; gold purchases, 89*; grossnational product, 44; interest rates,53t, 56; international trade, 30*;monetary policy, 48-49, 50; prices,46; swap transactions, 41

SYRIAN ARAB REPUBLIC — balance ofpayments and reserves, 122-23*;drawings, 99*, 101*; economic de-velopments, 70; export earnings,66*; international trade, 69*; re-purchase from Fund, 103*

TANZANIA — balance of payments andreserves, 122-23*; economic devel-opments, 69; international trade,69*; repurchase from Fund, 103*

TEA — prices, 65 1, 67TECHNICAL ASSISTANCE AND COOPERA-

TION — see FUND ORGANIZATION ANADMINISTRATION and FUND SERV-ICES TO MEMBERS

THAILAND — balance of payments andreserves, 122-23*; economic devel-opments, 68; gross domestic prod-uct, 68; international trade, 67*;rice prices, 65 1

TIN— prices, 64, 65t, 66*, 67, 68TRINIDAD AND TOBAGO — balance of

payments and reserves, 122-23*;Fund quota increase, 97; interna-tional trade, 71*; par valuechanged, 96*, 97

TUNISIA — balance of payments andreserves, 74, 122-23*; drawing, 99*;economic developments, 70; inter-national trade, 69*; repurchasefrom Fund, 103*; stand-by arrange-ments, 100*, 101

TURKEY — balance of payments andreserves, 81*, 122-23*; drawing,99*; economic developments, 82;gold purchases, 89*; internationaltrade, 80*; repurchase from Fund,103*; stand-by arrangements, 100*,101

UGANDA — economic developments, 69,76; international trade, 69*; prices,76

UNION OF SOVIET SOCIALIST REPUB-LICS— gold sales, 32, 85, 86t; seealso COUNCIL FOR MUTUAL ECO-NOMIC ASSISTANCE COUNTRIES

UNITED ARAB REPUBLIC — balance ofpayments and reserves, 73*, 78,122-23*; drawings, 99*, 101*; eco-nomic developments, 70, 78; exportearnings, 66*; fiscal measures, 78;international trade, 69*; repurchasefrom Fund, 103*

UNITED KINGDOM — balance of pay-ments and reserves, 3, 4, 7-8, 11,34, 35t, 36, 37, 38-39, 43, 120*;bonds, government, yields on, 55;bonds, industrial, yields on, 56 1;capital market, 52, 53, 54, 55; cap-ital movements, 36, 37, 38-39, 51,53, 54, 58; cost of living, 46t; cur-rency devaluation, 3, 8, 31, 39, 43,50-5 1 ; currency used in Fund transactions, 20, 104*; discount rate, 48-49, 50, 51, 55; drawings, 19, 106t,107-108; economic policy, 10; eco-nomic situation, 3, 5, 45, 50-51; em-ployment, 5, 45, 50, 51; fiscal pol-icy, 3, 4, 5, 47; Fund Article VIII,acceptance of, 95*; gold, foreignexchange, and reserve position inFund, 40*, 41, 42; gold market, 90;gold policy, 84; gold prices, 90,91 1; gold transactions, 89*, 90;gross domestic product, 4t; incomespolicy, 5; industrial production, 5,26t, 43-44; interest rates, 8, 39, 49,52, 53t, 54-55, 57t; internationaltrade, 25*, 26t, 27, 28t, 29, 30, 31,32, 63; monetary policy, 5, 48-49,50, 51; par value changed, 18, 96*,97; prices, 5, 46; repurchases from


200 INDEX

Fund, 19-20, 41, 102, 103*, 104*,107; stand-by arrangements, 19, 98,100*, 101, 106t, 108; sterling crisis,3, 38, 50-51; swap transactions, 40,41; wages, 5, 45, 46t, 50, 51

UNITED NATIONS — Conference onTrade and Development, 110; Fundrelations with, 12, 110

UNITED STATES — balance of paymentsand reserves, 3, 5, 7, 8, 11, 32, 33,34, 36, 38*, 39, 43, 121*; bonds,government, yields on, 55 1; bonds,industrial, yields on, 56 1; capitalmarket, 52, 53, 54, 55, 56, 57; capi-tal movements, 36, 37, 38, 39, 58-59; cost of living, 46 1; currencyused in Fund transactions, 20,104*; discount rate, 48-49, 50;drawings, 19, 98, 99*, 104*, 106t;economic policy, 10; economic sit-uation, 4, 5, 43; employment, 45;fiscal policy, 4, 5, 43, 48; FundArticle VIII, acceptance of, 95*;gold, foreign exchange, and reserveposition in Fund, 40, 41, 42, 43;gold holdings under earmark, 90;gold policy, 83-84; gold prices, 91 1;gold production, 87, 88; gold trans-actions, 89; gross national product,4t, 44; income tax surcharge, 5;industrial production, 5, 26 1, 43,44t; interest equalization tax, 59;interest rates, 39, 50, 53-54, 55, 56-57; international trade, 6, 26t, 27,28t, 29, 30*, 31, 32, 60, 61, 62t;

investment, direct, curbs on, 58-59;monetary policy, 5, 48-49, 50;prices, 5, 6, 43, 46; stand-by ar-rangements, 106t; swap transac-tions, 40, 41, 42; wages, 5, 43, 45,46t

UPPER VOLTA — Fund quota increase,98*

URUGUAY — balance of payments andreserves, 122-23*; drawings, 99*,101*; economic developments, 71;export earnings, 66*; Fund quotaincrease, 97, 98*; internationaltrade, 63, 71*; repurchase fromFund, 103*; stand-by arrangements,100*, 101

VENEZUELA — balance of paymentsand reserves, 32, 73*, 74, 122-23*;economic developments, 70, 71; in-ternational trade, 71*

VIET-NAM — balance of payments andreserves, 122-23*; Fund quota in-crease, 97, 98*; international trade,67*

WAGES — cost per manufactured unit,45, 46 1; industrial countries, 43,45t; rates, 45t

WESTERN HEMISPHERE — balance ofpayments and reserves, 32, 33*,73*, 74, 122-23*; economic de-velopments, 70; export earnings,61*, 63*, 66*; gold, foreign ex-

change, and reserve position inFund, 41*; international trade,62t, 63, 70-72; see also LATINAMERICA and individual countries

WHEAT — prices, 65 1WOOL— prices, 63, 64, 65t, 66*, 67WORLD BANK — see INTERNATIONAL

BANK FOR RECONSTRUCTION ANDDEVELOPMENT

WORLD RESERVES — see RESERVES,GOLD AND FOREIGN EXCHANGE

WORLD TRADE — 3, 6, 25-32; industrialcountries, 6, 25-29, 30-32, 61-63;primary producing countries, 6, 27,29-30, 61*, 62t, 63*, 66*; primaryproducing countries, less developed,30t, 67*, 69*, 71*; primary pro-ducing countries, more developed,30t, 80*

YUGOSLAVIA — balance of paymentsand reserves, 81*, 122-23*; draw-ing, 99*; economic developments,78, 82; international trade, 80*,82; repurchase from Fund, 103*;stand-by arrangement, 100*

ZAMBIA — balance of payments andreserves, 122-23*; economic de-velopments, 70; export earnings,66*; international trade, 69*; parvalue changed, 95, 96*; repurchasefrom Fund, 103*

ZINO — prices, 65 1


International Monetary Fund Annual Report 1968 - imf.org · INTERNATIONAL MONETARY FUND ANNUAL...

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